Strong corporate governance a must for long-term business sustenance of Indian enterprises

Published: November 1, 2019 12:41:58 AM

Corporates are well advised to adhere to the guidelines and framework to build a strong foundation for itself and survive the changing landscape of business environment.

corporate governance, governanceIn small and mid-sized entities, the tendency is to focus on the top line and dismiss the bottom line.

By Sanganagouda Dhawalgi

There are several cases where companies and promoters have gone bust in recent times and one can’t help wondering as to what exactly went wrong. Was there a lack of corporate governance culture that led to such a situation?

But a scrutiny in several cases often points to violation and lapse in corporate governance. While most public sector companies, large private sector firms (including MNCs) are known to invest in setting up a dynamic corporate governance framework; the same cannot be said for smaller and mid-size domestic companies.

In small and mid-sized entities, the tendency is to focus on the top line and dismiss the bottom line. In the process, investment in ethical organisational culture and governance structure is often ignored and is seen as a ‘cost center’. This attitude could be avoided during the first five years of the company’s life cycle.

In a growing start-up eco-system, a robust mechanism is a must to safeguard from collapse of the ecosystem.

Good corporate governance reflects a strong emphasis on risk management, enhanced transparency and greater stakeholder engagement. The Companies Act, 2013 and the Companies Rules, 2014 are efforts to ensure financial sustainability and enhance shareholder value. A strong corporate governance framework not only reflects strong emphasis on risk management, enhanced transparency and greater stakeholder engagement, but also ensures improved decision-making abilities and risk management capabilities along with protecting interest of all stakeholders—investors, employees, customers, suppliers and the public at large.\\

Sebi has released a new format of compliance report on corporate governance, but tit is only applicable for top listed companies. Even the amended Companies Act has provisions to strengthen the corporate governance framework, but is still loosely defined. Hence, avoidance is becoming a norm and statements such as ‘why incur the cost when it is not mandated by law’ often resonate in boardrooms.

Corporates are well advised to adhere to the guidelines and framework to build a strong foundation for itself and survive the changing landscape of business environment. Lastly, putting a robust corporate governance should not be taken as a cost center. Corporate governance will come with a cost, but the benefits far outweigh the cost.

Having said, we have to also differentiate between diversions of funds, and, thus, categorise certain loan defaults as fraud. If there is no fraud then filing of bankruptcy should be allowed. For instance, in the US if there are losses you are allowed to file bankruptcy under Chapter 11. The culture of being too harsh too harsh on corporate losses and failures, will kill the spirit of entrepreneurship. Issues of corporate governance need to be dealt with appropriately. The diagnosis of the intent is very important for a judgement call on such issues.

ED (Forensic Investigations), Netrika Consulting

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