"The Essential Book of Corporate Governance" | Genesis and significance of Corporate Governance

Whenever a ‘Satyam’ like incident unfolds, the debate on the quality of Corporate Governance gets heated up. Once the incident fades in the memory, the subject takes a back seat. In none of such debates, I remember to have heard/read about the genesis and significance of Corporate Governance, which I think leads to the recurrence of the unfortunate incidents of Corporate Governance inadequacies repeatedly all around the geography.

One of the greatest inventions of the planet earth has been the creation and evolution of joint stock companies. This institution has enabled savers with excess capital to pool in the surplus with the entrepreneurs who have ideas, abilities and urge to create wealth. The savers employ the capital and take the risk along with the entrepreneurs who toil to create value. However, the active managers of enterprises have often failed to multiply and/or create expected value, appropriated disproportionately and/or have played against the interest of silent majority of stakeholders. 

The agency problem, which was originally perceived by the father of economics, Adam Smith, is the real challenge that led to the evolution of the concept of Corporate Governance. The Corporate Governance essentially means taking care of the interest of all the stakeholders through optional wealth creation and sagacious sharing. Numerous instances of Corporate Governance failure have led to periodical refinements. In fact, the concept of Corporate Governance has been in a melting pot ever since. 

G N Bajpai, Former Chairman of Securities & Exchange Board of India (SEBI) and earlier Chairman, Life Insurance Corporation of India (LIC) has watched Corporate Governance evolving in India both inside and outside the boardrooms. He has also framed rules and regulations to improve the practices in the Indian Capital Market. His book “The Essential Book of Corporate Governance” published by Sage Publications and released recently takes a comprehensive look at the four pillars on which the edifice of corporate governance is erected: (a) Disclosures, (b) Related party Transactions, (c) Accounting Standards and (d) Board Room practices. “Human ingenuity continues to play around the frames and pillars, consequently the frame remains on evolutionary platform,” he brings out sharply. 

He, however, lays much greater emphasis on the boardroom practices. ‘The secret of good corporate governance lies in the Boardroom practices, as this is where one company scores over the other’, he writes. He outlines that the journey of improving quality of Corporate Governance begins with the composition of the board, selection of the directors, creating a strong framework of constant communication, building comprehensive and free and frank discussions (which values dissent) in the boardroom so as to optimise the utilisation of the talents, skills and ensure sagacious decision-making by the board. He is of view that vision and direction - strategy loop are the areas where the boards have the greater role to play and therefore, must spend more of its time and attention. The Executive Management has to focus on execution and value delivery – operations loop. He emphasises that complementarity in the roles is welcome, transgressing jurisdiction is not desirable. Replication by the board of what management is expected to do significantly reduces the contribution of the board and eventual value creation. Unfortunately, this is what happens in the Boardroom.

The reading of the subsequent chapters indicates systems and processes need to be reengineered periodically to ensure that all the pillars of corporate governance are not only strengthened constantly but also provide support to the other pillars and thus ensuring that the edifice of enterprise stands tall and erect. This will involve building strong mechanism for inculcating habits of transparency, diligence and accountability amongst the rank and file of the organisation, where reward, recognition and penal processes are inextricably interwoven. It is here the role of Monitoring Pyramid comes into sharp focus, he asserts. 

“Superficiality can be injurious to the overall frame and delivery of the output. The effectiveness of the monitoring pyramid has, therefore, to be assessed rigorously and religiously every year,” professes Bajpai. By quoting a number of researchers including a few empirical, he establishes that good corporate governance enhances the value of the enterprise and therefore makes an economic sense. He has outlined three ways of evaluating the quality of corporate governance. Bajpai has concluded by suggesting a methodology by which corporate governance can help in adding to enterprise value substantially. 

The environment is undergoing an unremitting transformation, which threatens the validity of every tool of management inclusive of corporate governance. What needs to be done to ensure that this important tool essential for the very existence of the institution remains potent and managements get enthused and encouraged to use it both in form and substance in the enlightened interest of all the stakeholders including themselves is the recommendation this book seeks to make. Constantly improving the quality of corporate governance seems to be the only way forward and this book attempts to show how. The book will surely be of use to all those who have anything to do with the corporate, in particular where ordinary investors are engaged. Charts and diagrams make the reading of the book interesting.