Governance – Raising the Bar

Corporate governance is a organisational structure of policies, processes and rules that direct and control behaviour of business. Organisations have to exercise strategic oversight over business operations while directly measuring and rewarding performance. In companies Board of Directors is central to its decision making and governance process. The Board of Directors in a company has to ensure compliances with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures. It is the responsibility of the Board of Directors to ensure compliances with the law.

Organisations have different corporate governance challenges. The practice and adoption of Corporate Governance is different in multinational companies, different in mid-size corporates and different in family-owned businesses. Also, it varies from industry to industry and evolves depending on their own circumstances. Each organization sets its own rules of corporate governance based on peculiarities of its external and internal environment which sometimes, unfortunately, are based on conveniences and fraught with dilutions.

Spirit is more important than letter

Multinational Companies and big organisations talk about corporate governance the most. However, there are many example where governance principles have been set aside in favour of other considerations. Consider corruption which comes in the form of concealed reward, incentive or inducement. Large companies often work on the “zero tolerance” to corruption mantra, but there are documented evidences, worldwide, of failures to adhere to this principle. To ease the passage of deal or loosen bottlenecks, they will pay an above-board fee to their consultants, advocates or public relations companies who in turn pay a good portion of their fees as inducement to get the work done. Such cases have been seen even in highly progressive nations that are considered to be having best corporate governance structures. Even in mid-sized & family-owned businesses there is presence of improper ways to get the work done.

Building trust, empowerment and team work

Corporate Governance says employers and employees should trust each other. Trust is another example where rules are different. For mid-sized companies or family-owned business, one can see a different level and form of trust. Employees in these companies can use their phones & laptops with no restrictions. Their laptop ports are not removed as employer and employee trust each other. But, in very large organizations, employees’ laptop ports are disabled or removed for any unauthorized use. Although these controls may stop instances of misuse, they generalize the lack of trust between employers and employees.

Large corporates talk promote values like delegation, empowerment, and team work. But at the same time these terms and values are often diluted. Especially large corporates or multinational companies have a power center called head office. This head office is not independent. This head office is also governed by a board, consultants & multidiscipline auditors and a strong IT enabled system like ERP. The combination of board, consultants and multi discipline auditors are the people who bring real value and direction to the company. Whatever they decide, is supposed to be executed as it is, by the local resident team of that company; they are not empowered. Even the local managing Director of multinational company has no major empowerment given by the board. For various reasons, the future trend is heading towards centralization. Thus, usage of concepts such as empowerment and delegation in corporate governance policies is not appropriate as it explicitly diverges from the central tenets of the core pillars and principles.

Similarly, we can argue upon this term of team work also. Large corporates have a well-documented job description for each employee and nobody prefers or is allowed to enter into the area of others. In fact employees are discouraged from interfering with the matters related to another department. These organizations work in compartments. Also, various management coaches and gurus talks in their corporate workshops in support of team work, while ignoring these facts of strict compartments which exists in multinational corporates.

On the contrary delegation, empowerment and team work, in mid-sized corporates, exist differently than that of multinational companies. In family-owned businesses, delegation and empowerment is more or less missing but teamwork exists at a comparatively higher level than very large companies.

Brand and its value

In the corporate world there is term called brand & brand values, which forms part of corporate governance. Many management geniuses say; brand is an identity of the product. It is asserted that products are changed to accommodate the market. One can buy a toothpaste of a particular brand, which is made in the UK and compare its taste and quality with same brand of toothpaste made in, say, Africa or India. The quality is completely different. The company makes the product based on various local conditions and peculiarities of the local market. Meaning, brand is not an identity of the product. So again, the question arises; where has Corporate Governance been applied by giving variation in the quality for the same product from country to country?

Healthy competition

Today businesses function in highly competitive scenario. There have been several instances where large businesses, with their power over monetary and other resources to kill small business by dumping products at a loss for sustained periods. Powerful and dominant business in industry uses predatory pricing, a strategy of undercutting prices on a large scale, and deliberately reduce its prices of a product or service to loss-making levels. In the process many good products and services provided by small businesses disappear from the market. Once competition is eliminated, abnormal prices are charged for the same product from the different markets. A question arises is this the correct application of Corporate Governance?

Across nations predatory pricing violates antitrust laws, as it makes markets vulnerable to a monopoly. Is aiming towards monopoly in Business a breach of corporate governance principles.

Many corporates generate sales by misleading advertisements of their products quality. In many advertisement, the brand ambassador is often a celebrity who talks & portrays as if, he/she is using the product & has achieved the desired results. This is not true at all, as most of the time the brand ambassador never uses that product. Is it matter of Corporate Governance? Creating controversy to get highlighted in media & attracting consumers attention is another misdemeanour of corporate governance especially in film industry & some other businesses. There have been claimed instances where a celebrity has been given a house or flat by real estate companies for free who never even visits there. This is used as a selling point for marketing to naive consumers, who buys the house thinking celebrity would be their neighbour. Good Corporate Governance!

Linking news stories with advertisements in electronic and print media to advertise the is also a big a breach of corporate governance ethics. Many of the leading magazines and newspapers in the world, publish articles that are included not on merit, but are paid.

Privacy Concerns

Many of the social media apps or TV Channels, project themselves as giving their services free, but in reality, they force advertisements or use your data, by getting authority from you unknowingly. A clear breach of transparency in the approach.

Dichotomy in functioning

It has been seen that two different wings of same organisation have altogether different approach on same issue. The hotel industry is conspicuous in advancing its environment credentials; hangers and stickers encourage customers to refrain from adding their towels to the daily wash in the name of environmental conservation. By contrast, this very same industry does not promote food wastage as egregious to the environment-meal portions served in half measures are not options presented on a menu nor is their discounted value: you order a meal, you eat half and rest goes to waste. What does this say about the environment standard embedded in Corporate Governance?

Another classic example is about corporates recruiting workers through contactors instead of keeping them as regular staff is a perfect example of diluting corporate Governance principles & practice. Such people work similar to regular staff but never get the same benefits.

Reducing tax burdens

Transfer price is a tool often used by multinational companies for not paying the taxes in the country where income is earned or shifting to tax havens. Does it give justice to country which has made this income possible for that company.

Have a responsible approach to CSR

It is said that when you donate from one hand, the other hand should not know. This is the true meaning of CSR. But how many corporates follow this. Many corporates design their CSR in such a way that it impresses the government or regulatory body or the general Public. On many occasions CSR activities of corporates targets it current or future market or market strategy. Corporate social responsibility, in real sense should not have any business angle. This practice raises question marks on the true intentions of corporate governance on such CSR activities in many organisations.

Endnote

Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, senior management executives, customers, suppliers, financiers, the government, and the community. Let us truly balance these stakeholders. Lectures on Corporate Governance by management gurus, corporate and business leaders are welcome but they need to raise the bar. There are many instances in different industries and within the same company that require a relook to have better governance.

It is the spirit of governance which is more important than any rule or law. In India the Companies Act, 2013 lays down a comprehensive governance framework, which as Chartered Accountants we all are aware of. However, time has come when the good governance practices percolates to each minutest aspect of the business. Then only we will enjoy real fruits of corporate governance.