Business value of good corporate governanceView(s):
The success of a company is often directly connected to the character and the relationship of the directors and the top management of the company, and in addition, when directors don’t put self-interest and self-preservation ahead of their stake holder interest.
Good governance in general gives the company the protection to operate effectively, the ability to do what’s right for the company and for the shareholders. That in my view is what ultimately separates good performing from poor-performing companies. In Sri Lanka, attempts to improve corporate governance in the past have been through the adoption of voluntary codes. We have generally followed the British methodology of enunciating principles rather than rules. The issue of governance has much to do with a value system and unless the values are clearly accepted, perhaps the only other way in which the end could be achieved is through imposition, although this is distasteful.
Some of our companies have chosen to interpret these principles in a manner that gives them the flexibility to ignore the principles when it suits them, especially when they look around and see others in other institutions not respecting the principles of good governance. Thus, in the context of Sri Lanka, the introduction of a mandatory code some time ago, which incorporates principles and rules to be followed, was timely, desirable and commendable because many business institutions occupy a special position of trust in the national economy. It is emphasised that they have broader responsibilities that go beyond their shareholders and employees by virtue of the role they play.
Therefore, it is abundantly clear that a board either not intended to merely rubber stamp or give air cover to the proposals of management. If the responsibilities are to be effectively discharged, it is important that persons of the right calibre are appointed to boards.
While integrity is an essential pre-requisite, this alone is not sufficient and directors must be people who are alert, have the ability to bring knowledge to the table, have the capacity to understand the inherent risks taken on by an institution and objectively analyse the proposals submitted by management on various aspects of a firm’s operations. Therefore, essential qualities of independent directors are curiosity, courage, persistence, have a good knowledge of the business, aware of the risks taken by the entity, able to manage the dynamics with the executive and demonstrate emotional intelligence to address issues constructively. However, it is equally important that a board has competence within it, which embraces other disciplines such as Law, Economics, marketing, Human Resource Management and Technology, so that a multidisciplinary approach is taken to managing risks, to challenge the strategy constructively to grow the business and also to make succession changeovers less distressing for the organisation.
One of the key factors on which regulators have sought to build a better governance framework is by having a number of “independent” directors on boards. While this is commendable in theory, it needs to be borne in mind that mere “independence” as defined in the code will not ensure that the director concerned will or can make the required contribution. In fact, given the incestuous corporate relationships prevalent in our small country, the Chairman’s school or golf buddy who fits the code’s definition of “independence” may in reality be less independent than someone who is “not independent” in terms of the code. It is also a matter for debate whether so-called “independent” directors who receive fixed and rather nominal fees for their services and have no real stake in the business are sufficiently motivated to enhance enterprise value.
However, true independence and effectiveness of an “independent” director can only be measured by the director’s actions in the boardroom and the freedom and willingness to leave the board if he is forced to compromise on the principles of good governance and not merely through the application of rules. Boards therefore need to somehow find broader sources of information, so they are not relying on one or two people, there is no substitute for spending time with management of different departments or sectors having them present directly to the board, visiting operations – not interfering but to understand what is really happening. In summary one could say that our experience is that rules could make the difference in terms of bringing about the required standards, but the mental attitude towards implementation in a manner, which enhances values, is what is most needed.
Therefore responsible self-regulation is required to counteract moves towards more intrusive rules, to enhance the competitive advantage in identifying and managing corporate governance risk at firm level and to overcome the systemic risk across the industry through shared standards of corporate governance practices. In the final analysis, good corporate governance is about instilling the “right values” into the people and also to influence the company to move beyond just short -term considerations.
(The writer is a senior bank director who wishes to remain anonymous).
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