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The Art Of Governance

The system to drive human behaviour to an acceptable level of compliance consists of carrot oriented rewards, recognition, positive peer pressure and ultimately employing the stick approach.

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The newspapers, over the last few months, have been flooded with news of leading corporates engaged in misdemeanours with regard to unfavourable corporate governance. Whether it is about questionable related party transactions or granting loans to entities with conflicts of interest or financial jugglery while reporting annual statements, corporate India is clearly far far behind from the requisite level of corporate governance. This takes deafening proportions as the default by one entity (e.g. IL&FS) can lead to an economy entering a full blown slowdown phase. Interestingly, it is not about education of the executive leading the company as IIM educated CEOs leading private banks have landed up in a similar soup.

A simple search on Google suggests that Taylor Swift generates twice the number of hits as the term ‘corporate governance’. It tells a lot about our mindset and what we prioritise!

Existing governance vehicles have comprised of board reform, technology to power up bourses and the stick approach!

There have been various reports on board reform in Indian companies, from the Cadbury report to the recent Uday Kotak report. Suggestions have ranged from mandating a minimum number of independent directors, minimum number of women directors, making all directors fully responsible and splitting the power centres by deploying a separate chairman and CEO. While some of these have been implemented in a fair degree of spirit, some of them are token implementations (e.g # of women directors). As voices for more robust governance emerge stronger, it is only a matter of time before board reform accelerates to the next gear.

With most aspects in business, technology has always enabled a system of fairer governance. Whether it is the bourses going online after the Harshad Mehta scam or all companies employing billing softwares for sales and expense control, technology based solutions have made the world a tiny bit more transparent. However, technology only remains an enabler and is at the risk of manipulation by its human masters.

No developed economy is insulated from the vagaries of misbehaving corporates. The stick approach, or fines, has been heavily deployed in advanced economies. Companies like Facebook, Volkswagen, British Petroleum have had to shell out billions of dollars for mismanagement or lack of adequate control. While the system of fines remains questionable, the ‘stick approach’ has to make a meaningful debut in India with corporate fines having been restricted to token contributions.

Going forward, in addition to strengthening existing systems; incentives for stronger governance, protecting data and employees will emerge the main driver of governance! 

Self-regulation, the world over, is emerging as an important tool to drive requisite corporate behaviour. Whether it is the mutual fund industry or the media conglomerates, the concept is  generating the necessary share of eyeballs. An associated corollary is the carrot approach for strong corporate governance. Inspired by the success of the Novo Mercado (new listing segment) on the Bovespa (Brazilian stock exchange), the National Stock Exchange (NSE) is introducing a new category for well governed firms that voluntarily comply with good corporate governance practices rewarding them with enhanced visibility and liquidity.

With corporate valuations increasingly turning dependent on Black Swan events (one instance of a data leak, one disgruntled employee or one irate politician), managing them will become an increasingly important element of corporate governance.

Over the last few years, there has been an increasingly legalisation of lobbying roles at conglomerates the world over. This trend is bound to continue with millions exchanging hands in salaries to ensure a favourable regulatory and political environment. For instance, it always hurts a company when the political head of the state is tweeting against the company everyday!

There is no need to introduce the need for data security. From Facebook to Ashley Madison (look up if you don’t know what I am referring to), data leaks can cost companies billions in fines and irreparable damage in imagery and equity. Employing a very strong governance mechanism to protect data is going to be hygiene in the days to come and will be personally monitored by corporate boards.

In the age of depressed citizenry looking to make a cause out of everything on social media, it takes one worker, disgruntled or just, to damage a corporate empire (e.g. Uber, various movie studios, Infosys). It will emerge as the single biggest governance prerogative for corporates boards and companies to keep their employees happy. Not just lip syncing but genuinely implementing what is necessary.

In conclusion, the system to drive human behaviour to an acceptable level of compliance consists of carrot oriented rewards, recognition, positive peer pressure and ultimately employing the stick approach. This ecosystem has to function employing all the above mentioned levers. However, humans being humans, they can break any system ever designed.  Remember Shashank Redemption?

Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.

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Sandeep Das

The author, Sandeep Das, is an MBA from IIM Bangalore, a management consultant, the author of “Yours Sarcastically” and a columnist.

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