Companies, especially listed companies, are required to adopt and display on their websites about a dozen policies covering different elements of corporate governance like Policy on Directors Induction and Training Program, Insider Trading, Related Party Transactions, Materiality, Whistle-blowers, and Ombudsman, among others. While these policies are mandated by SEBI regulations or Company law, the form and substance of these policies do reflect the quality of corporate governance in the Company. Our study of these polices over the last few years identified a few common shortcomings that are quite elementary in nature.
We have identified in the five questions issues which if addressed will enhance the quality of investor communication and make these polices your ambassadors of Good Corporate Governance.
- Is the objective of the policy along with the regulation under which this policy is mandated clearly captured in the policy document?
To be effective, policy documents need to capture their goals crisply and efficiently. An objective clause that captures its aim in simple language along with the regulatory provision it is based on goes a long way in ensuring effective communication.
- Is the person to whom the policy is applicable clearly articulated in the policy document?
For its effective usage, a policy needs to clearly identify and reach the class of individuals or entities to whom it is applicable. For instance, the Whistle-blowers policy should specify that it covers stakeholders, both internal and external. Likewise, the Directors Induction and Training Program should specify if it covers only independent directors or all directors. This clause is critical where the coverage is defined by mandate and the usage of operating words are different from its colloquial usage like ‘Relatives’ in Related Party Transactions or ‘Insider’ in polices to regulate trading by insiders.
- Is the designation of the person /body authorizing the policy clearly mentioned in the policy document?
Corporate policies derive their authority from an authorised body or individual regulated under the law. It can be the Board of Directors, a Committee of Directors, or an executive authority to whom the power is delegated. Specifying the issuing authority is essential for it to be a living document for users to get their doubts clarified when new issues emerge that may be in the grey zone, requiring interpretation.
- Is the date of approval and effective date of the policy clearly visible in the policy document?
The most basic issue in formal documents is the date on which it is approved and the date from which it becomes effective. While its presence does not add lustre, its absence severely dents the credibility of the policy and reflects poor governance culture.
- Is the frequency of review and the person responsible for reviewing the document clearly captured in the policy document?
As both the regulatory and business environment are evolving and in a state of flux, it is essential that every policy has a pre-defined interval or event that requires its review or revalidation. Making this a basic element of the policy adds vigour and makes it more effective.
While policies are only communication documents, they reflect a lot more than the elements they cover, for they represent the culture of the organization, especially in matters regarding governance that have their foundation in ethics, where the motive is as important as action.