Column : For the Rajus, by the Rajus

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: The rather exotic sounding, ‘corporate governance’ actually means something quite simple—accountability. The principal objective of corporate governance is to protect the interests of minority shareholders and investors from any arbitrary or self-enriching actions of promoters and senior management. In spirit, it’s very similar to the principle of accountability of governments in a democracy. Remember, that democratic government can never be about the ‘tyranny of the majority’. Good corporate governance is the key to ensuring the maximum value to the firm in the long run, just as good governance in democracy is key to a prosperous country.

Accountability in corporate management is not dissimilar to accountability in the sphere of government in a democracy. Think of individual ministers as members of senior management, Cabinet as the board of directors, ruling political parties as promoters, parliament as the AGM, and voters as the stock markets. Now, lets identify the different layers of accountability.

The role of senior management in a company is to formulate policy and strategy. This is what individual ministries do in government. All major proposals that come out of management meet their first check-point at the Board and its various committees. The Cabinet and its various sub-committees play the same role in government. The promoters of a company are usually represented in both the board and management, just as members of a ruling party occupy positions in cabinet and ministries. Given the sometimes over lapping interests of management, promoters and directors, (same parallel in politics) one can see how accountability may be weakened.

That is why modern company laws and market regulators insist on the presence of ‘independent directors’ on all company boards. In India, Sebi makes it mandatory for all listed companies with executive chairmen to have a minimum of 50% of independent directors on the Board. These directors are not related by family to promoters, and should not have been associated with the firm in any capacity—including external auditing or legal advisory roles—in the recent past. In theory, the presence of these independent directors should prevent inexplicable, dishonest and nepotistic, promoter enriching decisions, like the one made by the Satyam Board.