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Governance: a road map for cos

Governance: a road map for cos
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First Published: Mon, Jan 19 2009. 08 49 PM IST

Updated: Mon, Jan 19 2009. 08 49 PM IST
The issue of corporate governance has been the focus of increasing attention and debate in India over the past few years. The global governance journey has been a lengthy one—from the 1992 Cadbury Report through the 2003 Combined Code in the
UK and the Sarbanes-Oxley Act in the US, initiated after the high-profile corporate scandals of Enron Corp., WorldCom Inc. and Tyco International, Ltd. In spite of these and many other efforts around the world, there has been strong cause for concern in India and abroad regarding the effectiveness of these initiatives.
Today, the Cadbury Report’s two main concerns—about the dangers of corporate power concentrating in the hands of one individual and the need for shared responsibility in view of an ever more complex business environment —still exist.
And while efforts have been made to “define” governance and its standards, perhaps what has been missed out is an equally strong focus on implementation and practice. In this regard, it would be prudent to reflect on plausible solutions that companies have implemented or can implement in future to ensure that governance in corporate India is practised not only in letter, but in spirit as well.
Unless there is a genuine intention within a company to incorporate these into corporate strategy and operations, rules and laws will have a limited effect. Ultimately, governance best practice can only be driven by the board and top management who have faith in the system and are convinced of the benefits. There are some fundamental initiatives that companies can undertake to ensure transparency and accountability, two of the most important parameters of any governance strategy.
Separation of roles
One of them is the separation of roles of chairman and CEO. This was a key recommendation of the Cadbury Report and was endorsed by the 2003 Higgs Report and the subsequent Combined Code in the UK, where there are very few executive chairmen of major listed companies. Separating the roles has become more common in US-listed companies as well.
Over the past 10 years, S&P 500 boards have moved slowly but steadily towards separation. Sixty-one per cent still have a combined chair/CEO, down from 84% in 1998. Although 39% now separate these roles, only 16% have a truly independent chair.
Separation creates a clear delineation between the purpose and responsibilities of the board and the executive, and results in a more effective dynamic between the two. This demarcation has very clear benefits. First, the board should act as a critical
entity set apart from the day-to-day running of the business. It should not be run by a chief executive who could seek to dictate to or railroad the board on key issues such as recruitment
of directors. Instead, a chairman who is independent at the time of appointment is better placed to run the board in an even-handed manner, with the interests of shareholders being paramount.
Second, a non-executive chairman can make life less lonely at the top for the CEO by acting as a sounding board, mentor and advocate.
Third, a non-executive chairman is ideally placed to form a dispassionate view of the CEO’s performance, taking into account the views of fellow board directors.
Fourth, such is the importance of the board to the health of the company that it requires a skilled chairman who is not distracted by the daily pull of the business to devote sufficient time and energy to its management.
Independent directors
Separating the roles of chairman and CEO is not the only formula for improving corporate governance. Enter the senior independent director, or SID. The SID is an independent non-executive director with a few additional responsibilities—to chair a meeting of the non-executive directors without the chairman present at least once a year to handle the chairman’s evaluation and oversee the appointment of a new chairman at the appropriate time.
To a significant extent, the culture of the boardroom dictates the effectiveness of the board. At the same time, the mere fact that boards have independent directors does not guarantee that these directors will function independently. The board, led of course by an open-minded chairman, must create the right conditions before open, honest debate will take place.
In India, the challenge is to incorporate true transparency in boardroom functioning. Director behaviour today is, to a large extent, conditioned by culture—the culture of not expressing dissent very forcefully—and directors are, therefore, intimidated or unsure how their criticism will be taken.
What also needs to be understood is that dissent for its own sake is disruptive but where, for example, directors feel that the direction being set for the company is wrong or a decision-making process is poor, they should not hesitate to speak out. Equally, the existence of dissent in the boardroom is not something to be covered up with dissent being recorded separately from the minutes of the board meeting.
Other mechanisms
There are other critical mechanisms that can be put into place to strengthen boardroom independence. Boards now use an improved process for selecting new board members that is normally led by the nominations committee and not the CEO. “Executive sessions” of the board, held at least once a year without the CEO present, allow independent directors to discuss the effectiveness of management, quality of board meetings and other issues or concerns.
One of the trends observed over the past few years by Spencer Stuart at a global level is that boards are relying less on insiders and more on external sources for recommendations on new directors. Some companies have also already embraced the practice of having independent directors join management in conversations with shareholders.
A question of values
Corporate boards have a great responsibility to protect the interests of shareholders. The overall trends are positive, with boards being more prepared, more engaged and more willing to exercise their prerogative to act when the situation requires it. But how do boards demonstrate that they are doing their jobs? Besides economic performance, the exercise of basic governance best practices provides a good indication that boardroom decisions are being made in a shareholder- centric atmosphere.
However, mere compliance is not the answer. The intention to incorporate governance has to be based on well thought out core values and a desire to improve. Laws and regulations will continue to be framed but true governance will be driven by the commitment to make a difference.
Send your comments to spencerstuart@livemint.com
Anjali Bansal heads the India practice of Spencer Stuart, an executive search consulting firm, and is based in the firm’s Mumbai office.
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First Published: Mon, Jan 19 2009. 08 49 PM IST