5Qs for Every Corporate Professional: CimplyFive’s Five Qs to Answer while initiating Voluntary Governance Practices

The launch of a voluntary governance code by NSE for Indian corporates under the banner “NSE Prime” is a laudable initiative, which we believe is in the right direction, as good governance at its core is ethically inspired and based on voluntary compliance with both the stated and unstated needs of their stakeholders. In this context, it is worth looking back at the CLSA Study of April 2001 under the banner CG Watch, one of the earliest initiatives in this millennium, that explored the concept of good governance in emerging markets to rank companies with good governance.  In this study CLSA identified 58 parameters that could be answered in binary mode under seven distinct headings-Discipline, Transparency, Independence, Accountability, Responsibility, Fairness and Social Responsibility, which we feel are  not only comprehensive but also exhaustive.

This list we believe is not only comprehensive but also exhaustive.

To get a flavour, one representative parameter under each of the seven categories is listed below:

1. Discipline: Communicating an appropriate cost of capital and cost of equity that is used to measure internal investments
2. Transparency: Websites where announcements are promptly updated
3. Independence: Key committees like Audit/ Nomination committee chaired by Independent directors.
4. Accountability: Board plays a supervisory role and not executive role
5. Responsibility: Measures to protect Minority Interest shareholders
6. Fairness: Board remuneration not rising faster than net profits
7. Social responsibility: Explicit statement on equal employment Policy

While voluntary governance initiatives are exemplary practices that offer benchmarks for good governance, we believe enduring and sustainable good governance practices need to be integrated with the business requirements. With this as the key parameter, we believe that asking these five questions will go a long way in ensuring adoption of voluntary governance practices that are sustainable:

  1. . Voluntarily adopt a compliance practice that showcases your key business strength?

Tighter timelines for compliance than what is mandated by law can help showcase the robustness of internal systems and competence of your team, thereby acting as a key marketing tool by building a stronger corporate brand. A visible example of this is of IT Services companies announcing their results in the first fortnight after the quarter-end to showcase the robustness of their internal systems.

  1. Voluntarily disclose a key data point that can be leveraged in marketing communications?

Voluntary disclosure of data points like sales grouped by brands, tenure of customers to highlight customer retention or reporting sales from new products or new geographies can provide an audited number that can be leveraged in multiple communications to help build the company’s brand for making voluntary disclosures.

  1. Adoption of emerging governance practices from the leaders across the globe?/strong>

Adoption of emerging governance practices before they are mandated, like ESG Reporting or Integrated Reporting can help attract new institutional investors thereby enhancing the company’s shareholder value.

  1. . Strategic use of shareholder /stakeholder communication to encourage their participation in the governance process?

Warren Buffet’s letter to Shareholders of Berkshire Hathway is a standout example of voluntary communication that has stood the test of time. As an investor in other businesses, it is imperative that his shareholders, who are also investors, use the same set of tools to evaluate their holdings in Berkshire Hathway and what better avenue than using his annual communication. While each company must identify their unique technique for engaging with their stakeholders or shareholders, the benefits from such practices are common and not dissimilar to what Berkshire Hathway has realised over the years, if not decades

  1. Balanced Reporting of both business/governance positive and negative information in shareholder communications?

One of the key elements of good governance is transparent reporting, where both the positive and negative news are shared in time and whenever required. Often, the line separating companies with good governance and others is their propensity and willingness to share bad news without any mandatory or regulatory nudge. Companies that display initiative in sharing their concerns and risks much before it is legally required or mandated can build a reputation for not shocking their investors to enjoy premium valuation.

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