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Analytics of Corporate Governance (CG)
Dr. Manoranjan Sharma, DGM, Canara Bank

The origin and genesis of CG has a long history. But the drive to streamline CG received an impetus by the heady, powerful influences of the Watergate scandal in the USA, subsequent investigations by US regulatory and legislative bodies, proliferation of scandals and collapses in UK, the stunning collapse of BCCI, Enron, WorldCom, Parmalat and MF Global, rogue trading at UBS and the global financial crisis of 2008. Such disastrous collapses led to repeated investigations into CG, including the Cadbury Report. The collapse of banks and financial service firms revealed deeply disturbing CG lapses, such as, inadequate risk management, lack of director independence, conflicts of interest, manipulative accounting policies, director incompetence and lack of minority shareholder rights. Many members of Board of Directors (BoD) did not understand their business practices, failed to adequately monitor risk, and authorized incentive schemes with esoteric, high-risk transactions. The myopic “attempt to ramp up short-term returns through leverage” bred reckless risk-taking with short-term perspective and thus had devastating consequences.

Good CG is characterized by effective governance, enhanced business performance and accountability and governance code for corporate. In India, the Kumar Mangalam Birla report recognized the “fundamental objective of corporates is the enhancement of long term shareholder value while at the same time protecting the interests of other stakeholders”. 

The banking sector is distinctive because unlike traditional manufacturing corporations responsible for safeguarding and maximising shareholders’ value, the risk involved for depositors and the possibility of contagion is far greater than that of consumers of manufactured products. Further, the discernibly higher involvement of government in banks emanates from the overriding importance of stability of the financial system and the larger public interest. The depositors, particularly retail depositors, cannot effectively insulate themselves because of inadequate information, inability in coordination, unusual opaqueness of bank assets, and lack of both transparency and liquidity. Hence, the multiplier effects of the banking system on the rest of the economy and the interconnectedness of the financial system can trigger a contagion effect triggered by the instability of one bank, which would imperil a class of banks or even the entire financial system and the economy. Accordingly, robust and well-defined CG practices, on both a system-wide and individual bank-basis, are prerequisites to maintaining public trust and confidence in the banking system, which has a determining effect on the functioning of the macro-economy.

Transparency and accountability, the two basic tenets of CG, were blatantly ignored in the elusive search for beta and the all-pervasive pre-crisis environment of greed. The catastrophic global financial crisis raised serious concerns of executive compensation packages, accountability and responsiveness of banks and BoD, internal controls, risk management, role of shareholders, loss of investor confidence, supervisory review and follow-up, bank safety and financial stability. Hence, CG, which has significant contextual relevance, must surpass the conduct of business in accordance with shareholders’ desires and mere compliance with regulatory pressures because these requirements are necessary, but certainly not sufficient to implement sound CG practices. Accordingly, governance must go well beyond statutory compliances to give a fair deal to all the stake-holders, i.e., shareholders, bank customers, regulatory authority, employees, society at large, etc.

Eventually the sustainability of a corporate entity stems directly from its performance and the level of satisfaction of its stakeholders. In the ultimate analysis, CG has to be assiduously built on values and principles and a disciplined pursuit of truth and public interest. Consequently, CG is not a one-off measure but a part of an ongoing process, subject to rapid changes based on experiences, developments and policy-setting.

Boards, theoretically the centre-stage institution in the governance game plan, must perform their identified roles in their contributing, counselling, and controlling dimensions. The CG norms should transcend  cosmetic, check-box compliance and focus on increased board oversight of management, position risk management as a key board responsibility, encourage a more active role of shareholders and a paradigm shift in the nature of the director’s ‘job’. What is needed is a thorough streamlining of CG as an integral part of the blueprint for development to monitor, implement and enforce standards and codes, and facilitate possible reforms and improvements, focusing on the role of CG in the financial crisis; identifying the areas for reform; improving and supporting implementation of agreed standards; and supporting national, regional and global initiatives. But this ‘choice dynamic’ blueprint of monitoring, implementing and enforcing to achieve the desired outcomes in terms of responsibility, transparency and equitable treatment has to be founded on principles-based guidance. The significant underlying issues at work necessitate transformation of ‘sustainability’ into more concrete measures of corporate performance and embed sustainability into a new model of ‘stakeholder governance’. Simultaneously, there has to be a renewed thrust on significant legislative and regulatory changes in board structure, director elections, shareholder proxy access, Board practices, remuneration governance process, risk management and the exercise of shareholder rights.

These well-crafted strategies and prudential standards necessitate synchronised measures to consolidate strengths of both the individual constituents and the system as a whole. The effectiveness of industry-led, empirical research-based strong CG practices depends on the greater accountability of directors, managers, and professionals working for companies. Such “rules of the game” must eliminate ineffective policies, make unwillingness to change absolutely unacceptable and lift the corporate veil to minimise regulatory norms and adopt voluntary codes. This would help the Indian banking system to set and define new and higher standards of excellence and achieve global benchmarks in this increasingly networked world. Since CG does not only matter but CG is here to stay, sound and effective CG practices must be institutionalized to align corporate structure, business and disclosure practices.

In the short-term, an organization can promote ethical consciousness through its chief executive officer; develop well-defined organizational policies with ethical objectives and formal procedure for addressing unethical misconduct; develop a code of ethics; organize formal training program; establish corporate ethics committee and create and nurture an enabling environment for employees to blow the whistle on unethical policies and practices. In the ultimate analysis, a holistic approach and a paradigm shift from ‘business of business is business’ to ‘business of business is ethical business’ is needed to enhance the standards of governance to increase both efficiency and stability as also greater reliance on market participants.

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