Beyond systems, processes and controls

These three need to be implemented with a clear understanding of purpose

The efficiency of corporate governance rests on the effective functioning of the totality of the systems, processes and controls and on the people behind them. The substance of this article is not about what these are or should be — for there is enough documentation on that — but what lies behind these and why these often do not work. First let me continue for a while on the definition of corporate governance — the theme of my previous article (July 13) — simply because the more I wade through the literature on the subject, the more confused I am about the exact meaning of the term, feeling much like Tweedledee and muttering to myself, “Contrariwise, if it was so, it might be; and if it were so, it would be; but as it isn’t, it ain’t. That’s logic.”

There is a profusion of papers in research journals with high impact factor explaining the underlying issues of corporate governance and revered authors who have worked in or consulted with well-known domestic and global corporations have written articles and books replete with valuable suggestions on effective boards, significant homilies on what the directors including the independent directors should do in the board meetings and exhortations on how to make the boards deliver. Most of these presume the term corporate governance to be fully disambiguated, or if some chose to define, the coverage is very wide angled. 

Here are a few meanings attested to corporate governance in acclaimed books and papers in key journals of finance and economics.

• “The structure and functioning of the corporate polity”; polity presumably being the board of directors and/or senior managers who may have had director roles;
• “A process or a policy framework through which shareholders’ interests are represented, protected, or pursued in some way”; 
• “A means by which various stakeholders exert control over a corporation by exercising certain rights as established in the existing legal and regulatory frameworks as well as corporate”. 

The academic views of corporate governance are all “similar but not the same” but the definitions that have come to be globally adopted are those put forth in the Cadbury Committee in 1992: “The system by which companies are directed and controlled”; and refined and expanded subsequently by the OECD Principles of Corporate Governance in 1999: “Corporate governance involves a set of relationships between a company’s management, its board, its shareholders and other stakeholders. Corporate governance also provides the structure through which the objectives of the company are set, and the means of attaining those objectives and monitoring performance are determined.” 

Precision as a “desideratum for definition”. But this cannot be said of corporate governance. One reason for the amorphousness of the definition could be that its ontological basis is still far from being resolved. The other why — unlike the Euclidean axioms or the laws of physics — corporate governance eludes precise enunciation could be that boards and the appurtenances of corporate governance form a complex system comprising structures, relationships which inhere conflicts of interests, pathways through the relationships manifest in an organisation, overarching human behaviour and natural human impulses for ownership, dominance and control.

All patterns or systems in nature — from simple ones like the pendulum to the complex ones, like ant colony, a cluster of geese flying in the sky, the ecosystem, or for that matter our body, our brain — function with some governance mechanisms which display significant commonalities: hierarchal structures, natural feedback mechanisms, the ability to freely pass information and energy across the system. These allow the systems to function in collective sustainable harmony — a lesson to be imbibed by the systems, processes and controls devised by us. 

It is the people behind the systems, processes and controls that give life and meaning to those and not the systems and processes by themselves. Focussing on the systems, processes and controls, without giving due importance to effective implementation and clear understanding of the underlying purpose, is akin to metamorphosing these into resource wasting, meaningless and lifeless rituals. 

I am reminded of a joke which was in circulation on WhatsApp. In the kangaroo enclosure in a zoo, the officials kept on increasing the height of the fence, but could never stop the fellow roaming around the zoo. A camel in the next enclosure asked the kangaroo, “How high do you think they’ll go?” The kangaroo said, “About a thousand feet, unless somebody is wise enough to lock the gate at night!”.

The author is a former executive director of Sebi. Views are personal. pratipkar21@gmail.com