In an interview with CFO India, Johar Batterywala, Partner, Deloitte India talks on the corporate governance issues, why professionally managed corporate boards fail and what can be done to stem this rot.
Q: Why do professionally managed corporate boards fail? Are the reasons for failure different from those of companies under dominant investor families? Are these cases exceptions or an indication of a deeper malaise?
Johar Batterywala (JB): Considering a holistic view of the corporate governance inadequacies in the last few years, it would be tough to get pick a specific trend. However, what we do see are three gaps which may lead to corporate governance issues: board & management trust deficit; rigid boards; and inability to keep up with the evolving regulations.
These gaps are agnostic of company ownership. However, it would be fair to say that one or the other gaps tends to get magnified in certain situations.
Indeed, there is no systemic issue per se. Regulators have been very active to bring in swift changes and have been taking prompt actions where warranted. We also see a heightened sense of responsibility and rigour from the corporate boards.
Q: Why did independent directors choose to remain mute? What was the compulsion here?
JB: One of the gaps that we mentioned about earlier is the board & management trust deficit.
Let us look at the fundamental definition of corporate governance given by Sir Adrian Cadbury - ‘Corporate governance is the system by which companies are directed and controlled’. If we contrast this definition with the oversight responsibility of the board members as defined in Companies Act 2013 read together with LODR published by Sebi in 2015 and the recent Kotak Committee recommendations, evidently the lines are getting blurred in terms of an executive and non-executive/independent director's role.
Perhaps, the right set of questions to answer here would be, 1. Do the executive management and the boards operate in a collegial environment? 2. Is the board provided timely and right set of information to meet their fiduciary duties and finally 3. Are they willing to confront lapses and present opinions objectively?
Q: Is there something wrong with India's corporate culture, perhaps a lack of moral fibre embedded in India's business DNA?
JB: We talked about the corporate governance definition given by Sir Adrian Cadbury. Now let us look at how Sebi’s Narayana Murthy Committee defined corporate governance. ‘Corporate governance is beyond the realm of law. It stems from the culture and mindset of management. It deals with conducting the affairs of a company such that there is fairness to all stakeholders and that its actions benefit the greatest number of stakeholders. It is about openness, integrity and accountability.’
Quite clearly, the importance of corporate culture and tone at the top cannot be undermined. It is more crucial than ever, especially in the current context of volatile business environment.
Q: What can be done to stem this rot?
JB: We need to start with good governance systems, policies and practices, and then work towards:
• Aligning vision between shareholders, Board and the Executive Management
• Clearly defining roles with authority limits
• Establishing criteria to build a strong and independent board
• Building a strong management team (experience, technical competence, vision)
• Establishing open and transparent communication between the stakeholders.
Q: What does this mean for corporate governance in India going forward?
JB: The road ahead is long and winding. To effectively overcome the challenges, there must be dedicated focus in addressing the following aspects of governance:
• Shareholder democracy vs. stakeholder democracy
• Disclosures and transparency
• Compensation governance
• Risk governance and risk management
While the boards and the executive management collectively manage all these areas, consistent emphasis on strategy and value creation is imperative.