An Overview Through bad corporate governance companies may end not with a bang but a whimper without anybody knowing about it.
--BY JAGDISH PRASAD AGRAWAL
Governance is taking the centre stage in most of the discussions on public welfare issues vis-à-vis the state because despite good strategy programmes and adequate budgets, the implementation of these projects are not only slow but inordinately delayed so that the benefits to the stakeholders are in trickles which ultimately is attributed to the failures of governance. Business enterprises are equally sensitive for their success and failure on good corporate governance. Globalisation, the liberal market led business environment, the new modes of business finances, the ever widening scope of stakeholders and the ever emerging new technologies are all jointly and/or severally enhancing the risks of doing business anywhere in the world including Nepal.
Though corporate culture in Nepal is of a very recent origin and only slowly gaining ground, it is therefore, very important that good practices are inculcated in our corporate culture from the very beginning. FDI in infrastructural and hydro projects will definitely induce large investment in joint stock companies and will require effective and productive management structures by laws as well as by practices so as to meet the acceptance of all stake holders.
Traditionally corporate governance is defined as “maximising long term share holders’ value” but today’s business environment does not allow for the exclusion of other stakeholders such as customers, vendors, employees, consumer, creditors and the society out of the scope of its definition. Restricting corporate governance only to the shareholders and the creditors makes the enterprise too profit centred which in today’s social make up may go against the existence of the enterprise itself.
The companies with good corporate governance are uniformly transparent, systematic and with segregation of power between owners and the managers. Such companies have been appreciated always by the investors. Boards of directors are the investors’ custodians of trust and they take the decisions on their behalf in the interest of the company’s progress with malice towards none and charity for all the stakeholders who impact the success or failure of the company.
But the real world workings of the board of directors reveal the restrictive environment in which they have to function. This restrictive environment has been created because of a) Too many stake holders b) Strong laws protecting these stakeholders b) Scope of risks widening and d) Poor state of overall governance. Today’s corporate world has to operate under a very threatening complex business environment which is conflicting, diverse and comprises of individuals, institutions, public and private. Good corporate management consists of negotiating these contradictory and vested interests successfully and fairly. Sometimes in doing so the boards are compelled to make compromises and to take decisions which are less than the best. In this regard, the performance of companies from the developed world are better because their laws are conducive and the long history of good corporate practices evolved after many trials and errors have instituted a culture of transparency, reliability, independent decision making and accountability of their board of directors.
Recently there was a news headline in an Indian Newspaper which said “ Board of Indian Co. less effective than Global peer.” Global executive search consultant Russel Reynolds conducted a board behaviour survey to identify what makes an effective board culture. Some of their findings are quoted below.
Indian boards differ from Global Boards
i. 25% more process driven.
ii. 14% less active Chairman who fosters and facilitates high quality debate.
iii. 40% less importance on remaining fully present at meetings.
iv. 75% less focused on agenda at hand.
v. 95% more importance given to developing relationships to CEO, other directors and groupisms.
The above conclusions equally apply to the Nepali corporate world also. Mostly, decisions in the board are rubber stamped. The directors are not skilled, in-experienced and have no time to study the agenda at hand. It has become a profession in itself to be an independent director in as many companies as possible. Many of the independent directors are clueless as to what processes and systems should be in place for proper governance. In the USA Sarbanes-Oxley (SOX) reforms were introduced to beef up the quality of the Board of Directors in terms of performance and practices. These reforms are aimed at new standards of corporate accountability and responsibility.
In India also attempts have been made to address the issues of poor corporate governance by checks and balances through independent mandatory committees and by introducing independent directors on the board of public companies. However, the performance of corporate governance can be enhanced only if the qualities of the members of the board of directors improves and they be made responsible for the outcome of their decisions. They must :
a. Possess the courage to do the right thing for the right reasons.
b. Be willing to constructively challenge management when appropriate.
c. Have the experience to demonstrate sound business judgment.
d. Ask the right questions.
e. Have independent thinking and perspective on the business.
The concept of independent directors on the board has been brought in to improve the performance of the board of directors. But to do that they must have the above qualities. They must encourage a culture of discussion, detailed information and long term perspective in the decision making process. Impartial and talented independent directors can not only improve the quality of corporate governance but also hedge the likely threat by predicting a crisis.
Independent directors are supposed to provide value addition to the company’s performance. They should be made statutorily accountable for a company’s unethical behaviour, suspected fraud, regulatory infringement and violation of any other code of conduct. The reports that committees make should not only be discussed in the board and discussions noted but also a summary should be presented in the AGM.
In order to be able to supervise effectively and impartially the management of the company, the board of directors, should always comprise of supervisory directors, the executives should be present by invitation only.
A chairman should be a compulsory part of the board. His role should be to encourage and facilitate fruitful discussion with the focus on agenda. He has to be the bridge between the board and the management and must ensure that the directors do not fall into group thinking.
The committees especially on audit, nomination and regulatory compliance are an integral part of corporate governance. It is these committees which go into the details of corporate functioning and know firsthand the weaknesses and the threats that companies may face. These reports have become formal. It is upon the chairman and the independent directors to discuss these reports immediately on presentation and record the discussion and decision there on. A summary of these reports should also be presented to the shareholders in the annual general meeting.
Corporate governance, like the good governance of a country, is the backbone for the health of a company. If the corporate culture is sound and of a high standard Nepal can invite global cooperation in terms of investment in large projects. The legal environment will pave the way but it will not be enough to attract global investors unless our corporate culture matches global standards. It will be upon our Chambers also to play the catalytic role through awareness programmes. The government also has to encourage by incentives good corporate practices. At least, the public sector boards can take the lead and show more transparency in disclosures of their performances and decision making process. Stress on merit and to be seen taking decisions on merit will be the first step.
The institution of the board of directors and corporate governance of a company is too exalted in concept and much maligned in practice. Many corporations in Nepal as well as in the world have failed because the board of directors were not engaged in the operation nor were they organically involved in the strategy. They were guided by the briefings of the senior management and endorsed what was fed to them and took decisions without adding any value of their own. So long as the operations are smooth the role of the board of directors remains exalted but as soon as the threat starts looming the board of directors normally finds itself much maligned. The status is the same whether the company is private or public.
Good corporate governance basically avoids the above. It predicts threats, weaknesses and gives reliable sustainability to its strengths and explores opportunities all the time to enhance shareholders’ value. The Company Act of Nepal has to immediately acknowledge the necessity of improving the corporate governance of Nepali companies and find ways to amend it in such a way that it compares well with international ones. Through bad corporate governance companies may end not with a bang but a whimper without anybody knowing about it.
The writer is the chairman of Nimbus Group.