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Banking on board governance

We still haven’t evolved into a society where governance can be left to entities

No ideal form exists even today and efforts always would be to keep improving the dynamics, the systems and the inter-play between different agents—the ultimate test is whether it serves stakeholder interests.

By Srinath Sridharan

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Does society shape the concept of governance? What was unacceptable behaviour in previous human generations seems to be acceptable in the subsequent ones. Is that any sign of human behaviour to learn from for governance regulators? Conversely, do formal governance norms define societal behaviour? Can regulations attempt to play morality teachers? Does the concept and intent around ethics vary between cultures globally? What are ethics? Can they be measured quantitatively? Does it mean that one can have 86.7 % ethics and miss out the rest? Should these not be binary? Either you are ethical or you are not.

Corporate governance refers to the accountability of the board of directors towards all the corporation’s stakeholders—shareholders, employees, suppliers, customers, and society in general. The fundamental idea of corporate governance is to ensure the conditions whereby organisations’ directors and key managers act in the interest of the organisations and their stakeholders and to ensure the means by which managers are held accountable to capital providers for the use of assets. No ideal form exists even today and efforts always would be to keep improving the dynamics, the systems and the inter-play between different agents—the ultimate test is whether it serves stakeholder interests.

A simpler ask is for the boards to bring in FIAT—fairness, integrity, accountability, and transparency. Absence of an embedded culture of ethics and compliance can be misused by the “smartest person in the room”. Most of in-trouble entities start as completely ethical and legal businesses. In the absence of an emphasis on ethics, some promoters and/or executives would always be there to pursue “edge of the envelope” business practices which yield short-term lucrative gains.

Why is that the balance of pursuing market opportunities while maintaining accountability and ethical integrity has proved a defining challenge for business enterprises? The accountability and responsibility of business enterprise is constantly subject to question. Who questions the powers that exist?

US Senator Durbin’s comments at a Senate Sub-Committee hearing on Enron in 2002 are very much applicable to India—“I am always fascinated by how many people express an interest in how many boards of directors they serve on, and I just wonder if that is a real service, a real dedication, and a real commitment, or just another notch on your gun, another line on your resume, whether or not members of boards of directors of important companies really take that job as seriously as they should if this system is to work.” What is this fixation in being a director? Position without responsibility? Perks and privileges without accountability?
Not really. With the current regulations, it is far too onerous for any director. No wonder that informed and actively engaged individuals do not get excited about board roles. One of the constant asks from professionals is for better board compensation for time and risks involved. Currently, if we think that all entities have a high moral ground, probably we can start calling ourselves delusional. Legality and morality are different topics. One can be legally (or regulatorily) impeccable and yet be morally deficient.

Independent directors (IDs) can be truly “independent” when they do neither necessarily depend on the income earned by their board role nor are not controlled or influenced by anyone in their thinking and decision-making process. They cannot be morally, or otherwise, beholden to either the management or the promoter group. That is where the hurdles start. In most companies, the CEO and/or the board chairman, both of whom are usually aligned and non-antagonistic, select the ID. Largely, the so-called involvement of the NRC is mostly paperwork. The optics and sometimes the rigour of working with a head-hunting firm for the process is a good start. Hopefully, over time, this would become an involved NRC.

Boards also seem bored. How can we make them more engaged and actually discuss agenda in detail? What about the risk of the board missing its oversight itself? It adds up to a governance nightmare for the regulators. Worse, boards, for their lack of initial attention, go overboard in creating a mess for all stakeholders with undue haste and post-event coverup processes.

The regulators, especially financial and bank regulators, need that the boards have to supervise as first level guard rail, those entities on their behalf. That is where it is becoming increasingly a supervisory challenge, and yet too complex to quantify. Governance measures have to be both quantified and their qualitative aspects observed.

We still have not evolved into a society where trust-based governance can be left alone to entities. For every negative outcome of a broken trust, the society goes deeper into a remorseful bitterness about governance. In most cases, governance is equated with ticking the compliance and regulatory factors, rather than the spirit of governance test.

At the same time, expecting boards, especially financial entity board members, to have expertise in those sectors would limit the selection to “old boys network”, including the ex-CEOs and even regulatory seniors. This has to change. Boards do not need to have the same expertise or even experience in the same field of the entity; however, it is time the boards started asking questions. Sometimes, the change management that the board might have to initiate might even be change the management! There lies the challenge.

For such a transition, board members need to spend time and effort. We have to move from perfunctory board minutes being prepared and board meetings literally held between 2 flights that the board members have to use to get in/ get out of the city. Where is the adequate compensation for these efforts? Even IDs, being expected to be good samaritans, need ROTI (Return on Time Invested). We have not provided sufficient time and debate for figuring the adequate compensation for directors. Until that is addressed, the “side compensation” that seems pervasive in the industry would only make the directors more beholden to the “pay masters”.

Hope (of better corporate governance) cannot be a (regulatory) strategy!

The author is Corporate advisor and leadership coach
Twitter : @ssmumbai

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