COVID-19 pandemic has made us realize the value of having strong immunity to prevent health mishaps due to infections. Strong immunity is required not only for good human health but also for good corporate governance. Corporates in chasing steep and ambitious goals need to avoid the pitfalls of taking shortcuts to achieve results which could lead to unanticipated long term costs. Corporate history has repeatedly shown that an effective and good corporate governance system is a powerful vaccine that provides immunity against governance mishaps that can and have derailed even the best of corporates.
Listed here are five questions that assess the immunity of a corporate to governance mishaps. Answer these questions to know where your corporate stands on this immunity assessment.
- Is the Governance team distinct from the management team?
The concept of maker-checker which is used to prevent frauds in financial transactions plays a critical role in corporate governance too. Mandates and regulations separate the role of the executive management from the governance team in large, listed companies by ensuring a non-executive Chairperson or where the Chairperson has executive role by mandating the presence of majority of independent directors on the board. Even in unlisted companies, segregating these two roles would provide immunity to governance mishaps by building the required checks and balances.
- Is there adequate representation on the board for both executive and non-executive members?
The role of non-executive board members, especially the independent directors is to provide objectivity and longer term orientation in decision making and balance in reporting that comes from their detachment from day to day operations. This insulation is essential for strengthening corporate resilience that helps the company in acknowledging and responding to adverse situations for overcoming them.
- Does the business review system cover the process by which results are achieved?
Excessive focus on results combined with steep and ambitious targets often lures executives to take shortcuts to achieve results which go unnoticed, seeding potential governance mishaps. Comprehensive review system that considers the resources used and the process followed in generating results are key requirements in ensuring prevention of governance mishaps, thereby strengthening immunity.
- Does the remuneration philosophy encourage sustainability and long term orientation?
Rewards play a major role in promoting the desired behaviour. While group incentives and deferred compensation promote sustainability and long term orientation, individual incentive and current variable compensation is essential for immediate results. Hence striking the right balance between the two is critical. In the corporate world, experience has shown that excessive focus on individual incentives and current variable compensation lowers the immunity, while group incentives and deferred compensation raises the immunity to governance mishaps.
- Is sharing of negative news and drawbacks both with internal and external stakeholders encouraged?
A culture that encourages sharing of negative news and drawbacks is conducive for initiating corrective action to resolve the issue, as problems identified in early stages are more amenable to resolution. A strong performance culture built on collaboration and sharing of challenges and drawbacks increases corporate immunity, playing a key role in building a sustainable company that is immune to governance mishaps.
Like individuals, corporates need to be healthy, which in financial terms translate to sustainable profits. Just as healthy individuals get infected, so too are profitable corporates prone to governance mishaps in the form of misreporting, financial frauds, insider trading or unfair related party transactions that can threaten their very existence. While COVID-19 is said to be negated with two doses of vaccine, corporates for their immunity against governance mishaps need a continuous injection of good governance practices to keep them insulated. Periodic checks for symptoms identified in the five questions listed here can help prevent infection.