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Governance beyond boardroom composition

Is the inclusion of independent directors and onboarding women on a company board enough to raise the governance standards of a company? The answer is certainly not. Here we are not undermining the necessity of independent directors and women directors on the board but are addressing other key aspects that are quintessential for good governance.

Associating governance with solely boardroom composition is an old-school thought that needs to be done away with. Especially, in these dynamic times when corporate governance means so much more. A simple definition of this term is read as “corporate governance is a company’s modus operandi or the process by which a company is overseen and managed”. However, the understanding of this simple definition is much more complicated. It is an ever-evolving subject and has revamped its meaning over the decades, owing to events of corporate failure in the past. We believe that good governance is best understood through governance failures.

The Board of Directors (BOD) plays a vital role in influencing the governance of a company. They have a duty to ensure that all the important and mandatory policies are in place to help the company govern in a smooth manner. They should carry the vision to prepare a roadmap for the development of the company, ensure its effective implementation and manage the associated risks alongside. Another responsibility that the board is entrusted with is ensuring the integrity of a company’s audit and financial systems. When you read this, it immediately reminds you of the whopping 12000 crores scam at Punjab National Bank. It is an example of a complete governance failure of a public sector bank where siphoning off funds came to light when the figure reached 12,000 crores. It highlights the failure of the auditors, lack of independent audit, and incompetency of the board which couldn’t foresee any red flags. We wonder about the role of the Audit Committee and Risk committee in this bank!

BODs are relied upon by the shareholders because they cannot examine the affairs of the company on an everyday basis. Shareholder value creation is an important aspect of governance. And who is better than Amazon to consider this principle as its core value? Every year, an open letter is addressed to shareholders by its executive chairman Jeff Bezos providing them with insight into the company’s business strategies, resilience, disaster management, talent retention, research, and other developments. This customer-centric company is known for its governance for the past many years.

Business ethics is at the heart of corporate governance. The board is expected to carry out its functions in the most ethical and transparent manner. In 2015, Volkswagon witnessed a decrease in its share price by 50% due to the board’s corrupt intentions and practices. The incident was popularly known as “dieselgate”. In America and Europe, this automobile company malafiedly played with its engine by inserting a software defeat device in it in order to manipulate the pollution test results and emerge as a so-called sustainable company. The board’s unethical behavior that facilitated such strategies was directly proportional to the financial loss and reputational loss of the company. Volkswagen comprises a management board as well as a supervisory board. When a company has a two-tier board system, the supervisory board is expected to monitor the management decisions. However, in this case, the supervisory board failed to do so leading to a failure of governance.

The latest disappointment in the news has also shed light on how a failure in CEO succession planning led to a failure in governance. It was least expected by the shareholders of the coffee shop giant Starbucks. It was painful to see that the company which spends millions on leadership development, couldn’t find one deserving individual amongst its thousands of managers and executives to act as the CEO. It was a major governance meltdown in everyone’s eyes.

Another ingredient that serves good governance is that boards shouldn’t be resistant to diversity. They should be open to embracing the diversity of age, gender, race, experience, thoughts, nationality and culture. Lack of diversity makes the board and ultimately the company monotonous that lacks innovation. One of the most diverse boards, for instance, is that of HP. Its board has 58% minorities and 42% women.

Diversification and capital allocation are areas where the board should be efficiently opportunistic. It should have the vision to capitalize on emerging trends that guarantee a bright future. For example, an automobile company that innovates and brings a renewable energy-sourced vehicle or an electric vehicle to the table has a brighter future than one that is bringing the same petrol/diesel vehicles into the market.

The secret behind the success of an organisation is thus good governance. The key is to have the right people on board and maintain the right board culture. It is a fundamental requisite to augment the market and thrive on the trust of its stakeholders.

This versatile role, expectations from the person-in position, sound decision-making and much more can be understood through an e-learning course offered by Director’s Institute, a leading learning platform for professionals. The institute offers courses like corporate governance, independent director certification, and ESG certification in India. These courses are not limited to learning and developing skills but also allow you to connect with other professionals and board members in the community.

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