14th London Global Convention
Global Perspectives on Corporate Governance
By Dr Mohan Kaul Executive Chairman Commonwealth Investment Corporation
I am honoured to be here today to share with you some thoughts on Corporate Governance and its impact on business. Corporate Governance is not a new topic to all of us in this room. Given that most of you are CEOs, entrepreneurs and company directors, you are used to dealing with corporate governance issues.
But I believe until the financial crisis hit the corporate world, corporate governance was not a topic that attracted much public attention. It was a topic reserved for discussion in the Board rooms. The crisis impacted the future of corporate governance. While there were many players at fault for their contributions to the economic crisis, many observers faulted boards – the most important line of defence against corporate breakdowns – for a fundamental failure of oversight. And by doing so, the financial crisis has made corporate governance a major issue and has changed the way it is dealt with in the board rooms. I am, therefore, pleased that the IOD has chosen this topic for today’s discussion.
In my role as the founding Director General of the Commonwealth Business Council (CBC) and as the founder of Commonwealth Investment Corporation (CIC), as well as sitting on the boards of various companies – both big and small, I have seen how corporate governance plays a key role in the long term prospects of a company.
Perhaps it would be useful to begin by defining what corporate governance means. To put it simply- It is the balance of control between the stakeholders, managers, and directors of an organization. It is system of rules, practices and processes by which a company is directed and controlled. According to the IOD- Corporate governance is "the system by which businesses are directed and controlled". As mentioned before, the financial crisis had a big impact on the understanding and practice of Board rooms.
One positive outcome of the economic crisis may be a fundamental paradigm shift from concern over short-term earnings to a focus on more meaningful measurements focused on market viability, long-term sustainability, and consistent profitability.
A contributing factor to the economic crisis was that “outsized risks propelled enormous short-term revenues that fed top-executive compensation packages based on such near-term performance”.
As the crisis proved, I believe, short-term earning based on greater risk-taking is not consistent with long-term shareholder value. A more long-term focus by senior management in their decision-making could positively alter how business is conducted. Many companies have since taken the advantage to build a culture based on transparency, openness and corporate social responsibility.
As my good friend Narayana Murthy of Infosys has said “the bad news should take the escalator while the good news should take the stairs”.
Since the crisis, companies have witnessed some positive steps to ensure better corporate governance. I will share a few of these with you here today.
1) In the past 10 years, Corporate Governance has changed from ticking the boxes and filling in forms to, changes in the management culture and decision making. It has affected the culture of the organisations particularly how the Board of Directors are playing a role in managing the companies. It has also played a role in affecting the relationship between stakeholders and the company including shareholders, customers and employees.
2) Boards are responsible for ensuring senior leadership has applied due diligence to their decisions and for asking what risks the company is exposed to as a result of those decisions. However, though boards have had these responsibilities in the past as well, boards in general said that they did not get enough of the right kinds of information in order for them to effectively execute their responsibility of risk oversight. This is being addressed now.
Post crisis, corporate governance is being driven by risk assessment and management. Boards are now assessing management’s ability to reduce risk and determine if management is thinking broadly and carefully enough about risk. With this increased focus on management and business fundamentals, boards will also see increased demands on their time.
3) Roles between boards and management are also being redefined with this increase in board oversight. According to KPMG, “Top management will spend more of their time as stewards of risk”. In addition, senior executives will have to articulate, both internally and externally, the implications of such risks in order to satisfy an increased demand for transparency and the need to benchmark against other companies.”
4) In the last few years the organisational structure and corporate processes have got affected considerably to ensure the transparency of decision making. This includes how the directors are appointed, how the management decisions are made, how suppliers are selected and how the process of appointing and getting rid of employees has evolved.
5) A change of attitude is visible. Senior management are looking into not just big-picture evaluations, but more details of their businesses. I believe, management needs to challenge their assumptions and decisions and cultivate an environment where challenging assumptions is acceptable to promote the long-term betterment of the company.
6) Other changes we are already witnessing include the separation of the roles of CEO and Chairman.
The financial crisis had a major impact on big companies and in fact some like Lehman Brother paid a heavy price for their lack of good governance. Many wonder if good corporate governance is a matter only for big companies?
Small vs big companies
Many of you in this room are leading or working in small companies. As you know, the corporate governance for small and unlisted companies is very different to that for large, traded corporations.
Many unlisted enterprises in the UK are owned and controlled by single individuals or families. In case of India and Africa, this is more so, where a large proportion of businesses are generally owned and run by families. Good corporate governance in such a context is not primarily concerned with the relationship between boards and external shareholders (as in listed companies). It is neither about compliance with formal rules and regulations. It is more about establishing a framework of company processes and attitudes that add value to the business, help build its reputation and ensure its long-term continuity and success. It makes SMEs attractive to investors and helps companies identify and mitigate risks. As mentioned before, it also increases market confidence.
Corporate governance in India and emerging markets
Corporate Governance has changed universally both in developed and developing countries over the last ten years. The financial crisis did play a major role in the corporate governance issues in the UK. Similarly, in the last few years the issues of corruption did focus on corporate governance. This was more visible in the developing countries. In India, we have seen a more robust approach to governance and corruption; there are promising and positive signs.
However, there are certainly differences in practices between developed and emerging markets. In the developed markets there is increased emphasis on the structure and the processes. The banking crisis has increased the demand for transparency and adherence to set up processes involving Company Board and Directors and Management.
I would like to conclude by saying that I have generally found that there is a relationship between good governance and the reputation of the companies.
As Corporate governance has been thrust in to the public space, the investors and general public will react to any news or information on problems of the Governance for companies. The value of the company through the stock market does vary on the basis of news related to governance issues of the company. We are also aware that the mission of the Institute of Directors is to ensure the highest professional and ethical standards amongst directors and the boards on which they serve.
Moving on, I want to say, Training and Skills Development have played a major role and there are a number of working groups and think tanks focussed on corporate governance particularly in the area of training of independent non-executive directors. Companies like KPMG and institutions like the IOD have set up training and virtual institutes for information dissemination. These are important step in the right direction.
Risk & Governance
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