In the aftermath of the financial crisis, it is increasingly becoming apparent that Boards and management of many major institutions operated with inadequate and distorted information about the leverage and risks associated with their company’s assets. Perverse incentives, insufficient governance, and weak regulation clearly contributed to the crisis, which has been around for over three years and the world still seems to be recovering from it. Governments world over are struggling with unhealthy fiscal situations, and recovery has been slow and fragile.
New challenges have emerged – the sovereign debt crisis in Europe, rating downgrade in the US and unsustainably high debt in many other parts of the world. The spotlight on corporate governance is not just limited to the financial sector.
The recent closure of British newspaper ‘News of the World’ too showed the damage insufficient corporate governance can do to a company. At home we are waking up to the need for enhanced governance in public administration. The recent anti-graft Lokpal movement gathered massive public support.
Lokpal is aimed at instilling transparency, accountability and efficiency in public service.
Invariably, these events do have a silver lining – companies, regulators, and governments across the globe learnt several important lessons from the recession. Firstly, companies realized that their boards need to play far bigger roles in challenging management on strategy and the core assumptions underlying the choices made. Secondly, organizations are paying greater attention to their delivery model which entails taking a closer look at execution and resource deployment encompassing People, Technology and Finance. Thirdly, it is also about constantly keeping one eye on what is changing in the external environments (geo-political, competition etc) and making strategic re-alignments. As Indian companies go global, it is important to appreciate and factor in these lessons within the corporate governance ethos of an organization.
Globalization has made businesses more complex. As the proportion of global players entering emerging markets increases, established Indian players in several sectors will be exposed to more intense competition. Cost, quality,
innovation, and pricing will hold the key to future success.
Further, large conglomerates in the energy hungry and technologically inferior country are looking for strategic partners overseas to fuel their future growth. Today’s CEO more than ever before needs support to succeed in an increasingly complex and globalized economy and it is here that corporate governance can become a true differentiator.
The challenge lies in using corporate governance as a tool to build sustainable holistic changes to strategies and capabilities that go well beyond fi nancial success.
The process of value creation is a complex one involving many facets. Corporate governance is a two sided coin and it depends on the ability of the board and management to work together on a common mission and strategy. Corporate governance is a starting point in the discussion about the responsibility of the board and management to the company’s shareholders, employees, customers and the society at large.
Good corporate governance is not a goal in itself but a means to achieving the goal.