Promoting good governance

We need to look at governance practices as more than a compliance or survival requirement

Regulation drives governance practices in India that are traditionally led by compliance to avoid legal complications. Recent events, spanning Punjab National Bank (PNB) and ICICI Bank to several individual promoters raise fundamental doubts about the appropriateness of this strategy.
 
We need a paradigm shift in strategy to promote good governance, one that will bring promoters to the centre stage where they will enact the play, not because they are compelled to do so, but because they believe in it and enjoy doing it. Indian promoters and business leaders are yet to realise that they have an important and active role to play in building a culture of corporate governance embedded with stewardship. They will, then, feel responsible for adhering to or going beyond the obligatory requirements of corporate governance. We need to look at governance practices afresh as a personal corporate value of all key stakeholders, much beyond the current treatment of it as a compliance or survival requirement.
 

Illustration by Binay Sinha

Can fundamental and philosophical changes be brought about by regulations alone? Impossible! Who, finally, calls the shots on implementation of corporate governance in Indian private companies? Dominant control of most family and entrepreneurial ventures in India are in the hands of promoters. Superimpose the fact that about 73 per cent of all listed firms are family controlled in India. Also, more than half of the Nifty 50 companies are family controlled. Hence, every fundamental governance change initiative must include, in fact must begin with, the core stakeholders, the promoters. Whatever be the extent of regulations imposed following Uday Kotak Committee’s recommendations on private enterprises, fundamental and sustainable changes will not happen unless the promoters themselves are convinced about the relevance of the regulations and the long-term benefits accruing to them. Change cannot be imposed through legislation alone; there has to be an internal realisation and conviction in the minds of the promoters that all the reforms are in their best interests. Trust and not suspicion should be the fundamental assumption while brining about governance reforms. Unfortunately, most expert committees and Securities and Exchange Board of India (Sebi) have not paid much attention to this “developmental” approach. We outline here the core elements of such an approach:
 

• Set standards: The norms and regulations related to acceptable standards of corporate governance — must do and good to-do list, codes of conduct etc have to be put down. Some are legalities/rules to be mandatorily complied with and non-compliance will attract penalties; some are guidelines and advisories on best practices that are recommended, but better left to the judgement of the board. Parsimony and simplification should be the mantra in standards setting. Simpler the rules, clearer the implications of not adhering to the rules, greater the likelihood of implementation.

• Communicate and evangelise: We have come across many promoters who are not averse to following corporate governance standards, but often have misconceptions about the enormity of the tasks, cost of adherence and the concomitant benefits. Making companies not only aware but making them understand the core benefits of corporate governance and the costs of not adhering to the mandates are vitally important to promote better corporate governance in listed firms. 

• Enable: This entails helping companies embrace good corporate governance principles and practices by creating opportunities for training, exchange of ideas, developing deeper pool of potential directors etc. Not only educating the minority and non-promoter investors and making them aware of Sebi norms and guidelines for corporate governance, but also how they can play a more active and constructive role including direct participation in governance of their companies and be more proactive and involved in safe guarding their interests.

• Enforce: If the regulations are not complied with, there should be quick enforcement of penalties as per rules and regulations. This will act as the ‘stick’ to not only prevent people from playing games but also get the slow movers to get into serious action.

• Incentivise: Reward companies that set sustained good examples of good corporate governance. Not sporadic, but an orchestrated movement of celebrating corporate governance success would be welcome.

 
Given that almost all listed family businesses had an entrepreneurial start someday when the business was treated as an extension of the family for both financial and management purposes and promoters continued to believe that the entire organisation belonged to them even after listing, a fundamental change in the mindset is not easy. Although they steadily dilute their ownership control to meet their requirements for funds to finance growth, the promoters rarely dilute their management control voluntarily. Our intense interactions with promoters have reaffirmed the conviction that they are driven by the “owners’ passion”, and honestly believe that they have every right to manage “their business” the way they want, even if others have invested funds, sometimes much more than them. Added to this is the complexity of most of them not having adequate exposure and experience in managing a highly governed organisation. In essence, they have grown in size following a “discovery driven journey”.
 
Reforms require a change in mindset, and this can be accomplished by a combination of enlightenment, enablement, carrot and stick, at the promoter level. As businessmen, promoters will definitely weigh the costs and benefits of practicing governance. The focus of the discussion should shift to finding ways to make promoters the “owners” of high quality governance principles and practices in their organisations. Until the Sebi and other institutional agents of change are convinced about the criticality of such an approach and take adequate and relevant measures, nothing much will happen until another committee of reforms is appointed.
Ray is Professor, Indian Institute of Management, Calcutta; Ramachandran is Professor and Executive Director, Thomas Schmidheiny Centre for family Enterprise, Indian School of Business