Corporate Governance - An Overview

Corporate Governance as a practice has been gaining importance ever since the economic turmoil
caused by the bursting of the dot com bubble in 2002. Corporate Governance is basically a detailed
disclosure of information and an account of an organization’s financial situation, performance,
ownership and governance, relationship with shareholders and commitment to business ethics
and values. The relevance of corporate governance has increased several times since the concept was
introduced. With the introduction of globalization and competition, managing shareholder expectations is
no longer the mantra for success. The current economic crisis is often blamed at poor regulatory and
check mechanisms for the business, which has led to ramifications which are far reaching both
geographically and socially.

A corporation is created to address objectives which are much more than creating products and services,
it has to serve the larger purpose of satisfying multilevel needs of the society. Healthy corporate
governance practices are no longer the need of the law but have become essential for the very survival of
the organizations, the current economic crisis has proven that beyond doubts.

The corporations have always faced the tug of war of protecting the interests of the shareholders (the
legal owners) or the stakeholders which includes suppliers, creditors, government and communities.

It would be interesting to note that the definition of corporate governance changes in different cultural
contexts, for e.g. let us study a definition provided by the Center of European Policy Studies or CEPS as
it is called. CEPS defines corporate governance as the whole system of rights, processes and
controls established internally and externally over the management of the business entity with the
objective of protecting the interests of the stakeholders. Contrasting to this, the Anglo American
defines it with an emphasis on creating the shareholder value. Let us also look at the definition provided
by OECD or Organization for Economic Corporation and Development, which brings together different
democratic governments which are committed to sustainable growth and improving the living standards of
the communities.

OECD defines corporate governance as Corporate Governance is the system by which business
corporations are directed and controlled. The corporate governance structure specifies the distribution of
rights and responsibilities among different participants of the corporation such as the board, managers,
shareholders and other stakeholders, and spells out the rules and procedures for making decisions on
corporate affairs. By doing this, it also provides the structure through which the company objectives are
set, and the means of attaining those objectives and monitoring performance.

The biggest incident which shook the world and questioned the existing corporate governance practices
was the Enron debacle in the USA. The doctored accounts which flouted all the established norms of the
accountancy practices, false financial statements and the executives who pocketed millions of dollars by
selling their share of stocks while laying-off the 20% of the organization’s workforce, painted a grim
picture for the investors all across the world.

The fundamental question posed by the Enron crisis was the morality of corporate decisions,
embezzlement of funds and the larger interest of all the stakeholders right from employees to society in
general. The disturbing aspect was the inability of the external agencies like auditors, credit rating
agencies and security analysts to see the real picture. A more recent example is the involvement of
Satyam Computers Services Ltd, a reputed software firm of India in multimillion dollar accounting fraud
which ultimately led to a huge face loss for the entire Indian IT industry. The involvement of the reputed
external agency like PricewaterCoopers (PWC) in the scandal made the entire episode a nightmare for
the regulatory bodies, the government and the employees of the organization.

The objective of the corporate governance is hence the prevention of such scams in the business which
have a huge bearing not only on the immediate shareholders but also on the morale of the larger
stakeholder groups.
What is a Corporation: Evolution,
Features and Purpose
The corporation has been defined in many ways as interpreted by individuals; however lawyers and
economists call it a nexus of contracts. This means that a corporation is nothing but a sum of all the
agreements which lead to its creation. Corporations are also defined as a device for obtaining individual
profit without individual responsibility.

To define it more visually, a corporation is a structure established wherein different parties come together
and each provides capital, labor or expertise to maximize profits for all of them. A corporation has wide
variety of constituents and it needs to relate to all of them; like investors, shareholders,
customers, employees, suppliers, creditors, government and finally the community.

Legally, a corporation is identified as a fictional person for some purposes however the corporation itself
is separate from its owners and employees. This means, what is owed to the corporation cannot be owed
to the people who make the corporation. So is a corporation is sued or gets bankrupt, the individual
members of the corporation are not liable to pay the debts.

Let us explore the evolution of corporations into the form we know today. To begin with, in the earlier
times, the educational and religious corporations were given considerable independence and perpetual
existence to evade the all encompassing power of the king. Later, corporations were set to address
state’s specific needs like establishing colonies during the colonial era. Initially, corporations were
characterized by a few wealthy people who negotiated amongst themselves, invested capital and worked
towards maximizing profits. However later in the nineteenth century; the rapid technological progress
brought the idea of having larger firms employing hundreds and sometimes thousands of people. The
other significant aspect was the need for the capital which was earlier provided by a few wealthy
members but now proved inadequate to support the operations of such large firms. The ramification of
these changes was the emerging acceptance of the concept of private property which was hitherto
unknown as all properties were considered to be belonging to the state or the religious institutions like
churches.

There are certain critical features of the corporation which helped its popularity and laid the
foundation for the modern day form as we know today.

 The limited liability which means that the corporation is different from its owners and employees
provided the much desired flexibility to the business. This led to buying of stocks of large
corporation by people which gave them the relief that if losses happen it would be restricted to the
proportion of investment and not be unprecedented. Since, the investment and risks were low,
the control of shareholders was also less unlike in the case of partnerships were each partner
held a considerable share and could have taken decisions.
 The second aspect was the transferability of holdings freely, a shareholder loosing on stocks can
sell it immediately and recover the investment however in case of partnerships the complexity of
evaluating the value of the partnership and the non existence of a stock exchange to trade
partnerships made transferability difficult.
 Legal Personality provided by a corporation is also an interesting aspect, a partnership may end
with the death of a partner however a corporation can exist till the time it has capital. Also, certain
acts result in legal actions against an individual under ordinary circumstances; but when these
are committed by him/her as a part of a corporation, they cannot be held liable for them, legally.

Lastly the society can regulate corporate actions through taxes and fines and direct them to pursue not
just economic but social goals as well. Corporations have also gone through the Darwinian principle of
natural selection and evolution. So the processes and systems keep changing with the time and context
in which the corporations operate.

What is Good Corporate Governance

?
Corporate Governance is the art of directing and controlling the organization by balancing the needs of
the various stakeholders. This often involves resolving conflicts of interest between the various
stakeholders and ensuring that the organization is managed well meaning that the processes, procedures
and policies are implemented according to the principles of transparency and accountability.

Whenever one speaks about corporate governance, it has to be borne in mind that the organizations
have duties and responsibilities towards their shareholders and stakeholders and hence they need to be
governed in accordance with the law and keeping in mind the interests of the stakeholders and
shareholders.

The next aspect of corporate governance is that the notion of economic efficiency must be followed when
directing, managing and controlling organizations. For instance, it is truism that corporations exist to make
profits and hence the profitability and revenue generation ought to be the aim for which the corporates
must strive for.

Of course, this does not mean that corporates can cut corners in their pursuit of profit and power and
hence taken together with the principles in the previous paragraph, corporate governance means that a
corporation must strive to generate revenues and make profits in a transparent and accountable manner.
What this means is that the way in which corporations are managed and directed have to be done in
accordance with standard norms and procedures that apply to ethical and normative conduct.

Corporate Governance has been in the news for the last decade or so following a spate of scandals that
engulfed companies like Enron which led to their collapse because of mismanagement. This prompted
regulators all over the world to implement various acts and rules to rein in irresponsible corporate
behavior that would mar the prospects of the corporations and cause harm to their shareholders and
stakeholders.

Acts like the Sarbanes Oxley were passed to enforce greater oversight over corporations and ensure that
they did not overreach themselves in their relentless pursuit of profits. Indeed, it can be said that the
Enron debacle was a wakeup call for corporate America to set its house in order. It is unfortunate that
some of the lessons learnt during the early years of the last decade were forgotten leading to gross abuse
of corporate power in the run up to the global financial crisis.

Broadly speaking, corporate governance can be said to encompass the tenets of rights and equitable
treatment of the shareholders and the shareholders and following ethical business behavior along with
practice of integrity.

Good corporate governance means that the processes of disclosure and transparency are
followed so as to provide regulators and shareholders as well as the general public with precise
and accurate information about the financial, operational and other aspects of the company. As
has been mentioned elsewhere in this article, corporate governance is a term that means many things
and the bottom line for good corporate governance is the dual aim of pursuing profits and doing so in a
transparent and accountable manner.

The subsequent articles in this module introduce the readers to various aspects of corporate governance
and include a discussion of why the ongoing global financial crisis represents a crisis of capitalism that is
characterized by poor corporate governance.
The Role of the Government:
Legislation and Regulation
The often discussed and much criticized role of the government in regulating the corporate has gained all
the more importance in these changing economic times. It’s time that the governments took more active
role in regularizing the corporate through necessary means as we have learnt the painful way that the
corporate crimes or the white collar crimes as they are called not at all victimless. So, if an old employee
losses all his pension and savings on account of a corporate fraud committed by his organizations, the
ramifications are long term. The mere wrist slapping exercise and sometimes even bail out that the
government finances for erring corporate, surely does not act as a deterrent for others.

The very complex nature of the government and corporate can be clearly studied in the ongoing
crisis in the European Union where the question of whether to use tax payers money to bail out
Greece’s economy has become a political decisions rather than a business one. So what is the
alternate path? Allowing self regulation by organization means making fox the shepherd, while on the
other hand, going by the rule book approach of the US government has also been under much criticism,
more so after the current financial crisis begun.

The other aspect of the scenario is the fact that fines are considered to be a part of doing business by the
corporate, and the civic penalties that are occasionally levied against them is hardly enough to set
example. The criminal sanctions against corporate are not a common phenomenon and the experts
believe that can be more potent in deterring corporate misconduct. However, the other side of the coin is
the fact that most of the regulating authorities like SEC etc have no authorities to impose criminal
sanctions against corporate. Also, the penalties and fines bring no respite to the employees, shareholders
and communities. [Recall the Bhopal Gas Tragedy]. Reasonably evaluated criminal and civic sanctions in
a mix as appropriate can help address the issue.

The choice of going after the corporation or people, who have been involved in the misconduct, is another
important consideration. A rather fair and objective view of this issue is that if the organization has a
proper system of safeguards and checks in systems and processes and if the misconduct profits just one
person, in this case even the corporate becomes a victim. For such situations a single person can be
accused of embezzlement and liable for prosecution however if the fraud is at a larger level involving
more people, the situation becomes complex, whether to hold liable the board members and senior
leaders for failing to ensure the prevention.

The recent legislative development has come up with a guideline for the corporate:

 Code of Ethics
 Certification of financial information by the CEO and the CFO
 Provision and protection of whistleblowers of misconduct

The government should also ensure that there are not too many agencies to act as enforcement
authorities as this may lead to conflict of interests.

The Morality and Accountability of

Corporate Decisions
In our previous discussion we have come across the fact that it is hard to establish the accountability
and responsibility of corporate decisions but does this mean that a corporation can take infinite
liberties with the flexible law structure and systems ? Is it possible for corporate decisions to be moral with
social goals met along with the business ones ? Before we dwell deeper into discussing the aspects of
corporate decision making, it would be appropriate to understand the expectations of the communities
from the corporate.

Community members want jobs which would give them descent income or wage as well as which
challenges ingenuity and creativity, they need goods and services which are of a descent quality and a
safe and healthy work environment. Community members also want their share of interest in the
corporation either as an employee, shareholders, suppliers, creditors or just as neighbors. There is a
certain level o trust and agreement whether written or otherwise which exists between the corporation
and these constituents. These agreements are sometimes between the corporation and its employees,
suppliers, creditors and while some other agreements are imposable by the legislature.

The public law provides a platform on which the corporations can decide their transaction with
these constituents while also providing them the flexibility to expand and contextualize them as
per their needs. The legislature is to ensure that the objectives of the corporation are beneficial for the
society as a whole and there is no conflict of interests.

Another significant aspect of this discussion is that both the government and the business have always
influenced each other liberally. So a senior corporate chief who makes political contribution with an open
heart may have a strong impact on the laws created by the government regarding the competition. The
ideal state or the corporate is the free market where there is minimum interference from the government.
But, the recent economic crisis has brought the question of whether to have a free market or not, once
again into the foray of discussions. However, the governments have always been rather proactive in
making accommodation for the business where the long term societal needs and financial implications
are overlooked.

Above all, the biggest factor which influences, directs and redirects the decisions of the corporate
is the market itself. With the corporations spreading across the globe, it is difficult to determine their
domicile and therefore the need to have a more congruent corporate governance structure arises. It is
also important that corporations base their decisions on long term strategic and financial planning rather
than engaging in short term profits and gains. The impact of corporate decisions are huge not just on
economies but on the lives of the common man as well.

To go by the directions provided by the World Bank for the emerging economies, the three points have
been identified:

 Transparency
 Independent Oversight
 Accountability

In order to maintain its legitimacy and credibility the corporate would have to base their decisions keeping
the above parameters in consideration. The self regulation by corporate remain a distant possibility in the
near future, especially in the wake of the current economic crisis, the role of legislature and government
becomes paramount in ensuring that the larger interests are not compromised.

The Significance and Impact of

Corporate Behavior
The corporate behavior tends to have a direct or sometimes an indirect impact on the economic state of
the countries and communities they operate in. The very recent examples was the economic crisis in US,
Brazil and Asia in 1998 and hard to forget ever continuing financial meltdown of the current times. Any
lack or deficiency in the corporate governance structures has a potential to threat the stability of
financial structures globally.

The most important objective of a corporation is to serve social and economic goals however simple it
may sound, in practice it’s the economic goals that prevail. Can there be a process to make corporation
accountable for its actions and decisions. For e.g. hundreds of people lost their livelihood after the
Lehman Brothers debacle and the financial crisis that followed, but who was to be held accountable for it?
A corporation also needs to act within the limit of the law, however it is interesting to observe the
converse; that if there is no compliance and a corporation engages in criminal activities, there is no body
to be prosecuted and punished.

It is essential to understand that corporate tend to engage in criminal behavior because the benefits
outweigh the risk and the resulting costs which are enormous are borne elsewhere. And it’s the
shareholders who feel the brunt from all sides, as members of the community they pay the cost of the
crime itself, as taxpayer they pay for the cost of prosecution and ultimately as a shareholder they pay the
cost of defense and penalties.

It is sad to note that the white collar crimes as these are not treated at par with criminal offences while the
cost factor involved is much higher in the former category of offence. The corporate managers involved,
rarely ever lose their jobs and the companies pay the hefty fines and legal fees. Also, since there is no
clearly established system of accountability for corporate which can be acceptable by shareholders,
employees, suppliers, government; the kind of punishment for corporate crimes remains a difficult area
even for the legal experts. It seems that a certain level of corporate crime is just accepted as a way of
doing business.

During the recent times it has been observed that there is a direct impact of financial systems on growth
and removing poverty. The development of banking systems and market finance drives economic growth
as does the role of legal foundations for financial market development; external financing and the quality
of investments which bear an impact on the growth of the economy. In such a scenario, the importance
and relevance of having a good corporate governance structure in place goes a long way in ensuring a
better lifestyle, economic growth and prosperity for the members of the community. To prevent the
financial crisis of the current times and to make corporate behavior responsible and accountable, it is
necessary that a thorough system of checks be established. The initiative is to be taken by the
government, the corporate and the legal structure of the countries in which the corporate operate and the
approach should be to create a standardized structure acceptable everywhere in the world.

Factors Directing Corporate Behavior

The business landscape of the 21st century is littered with companies that have failed to keep abreast of
the changing trends, ideas and the pace of technological change. In this context it is important more than
ever for corporates to practice good corporate governance since an approach that is fair and ethical as
well as transparent is likely to lead to greater productivity than an approach that favors short term profits
and encourages cutting corners. Hence, it is pertinent to look at some of the factors that drive corporate
behavior from the perspective of good corporate governance.

 To start with, the profit motive is the major or the chief factor that drives corporate behavior. For a
long time, profits were the sole criterion by which corporates were judged and hence,
corporations indulged in the “pathological pursuit of profit and power” at the expense of
everything else.

In recent decades, the business paradigm has shifted somewhat with corporates now engaging in
some measure of socially and environmentally responsible behavior to reflect the changing times.
However, it is by no means certain that the corporations have abandoned their relentless search
 for profits as can be seen from the spate of corporate scandals involving unethical and illegal
business practices.

 The next factor that drives corporate behavior is the consumer preference or the way in which
consumers vote with their feet in buying products and availing of services. Indeed, the pursuit of
profits and the consumer is king motto exist in a sort of creative tension since satisfying the
consumer in all respects means that corporates have to forego some of their profits and when
corporates cannot satisfy consumers, they flock to their competitors. Hence there is a
contradiction of sorts which only the market based economies are able to find solutions since the
markets correct these contradictions by virtue of their existence.
 The third factor that drives corporate behavior is the presence of absence of regulations and rules
governing corporate conduct. In countries where regulators do not have much power,
corporations tend to run amok in the market and make everybody dance to their tunes. On the
other hand, in the developed countries and in countries where the regulators do their job properly,
corporations cannot take the consumers and the regulators for granted. Of course, the ongoing
global financial crisis has proved that even in the developed west, instances of corporates taking
the consumers and the country for a ride have been surfacing regularly.

What is clear from the preceding discussion is that among the various factors that direct corporate
behavior, the one underlying or common theme is that the interaction of markets and market players often
dictates the outcome more than anything else. The prevailing view that markets know best has somewhat
been challenged in recent years. Hence, more than ever, there is a need for corporates to rise to the
occasion and present solutions instead of finger pointing and indulging in blame games.

Finally, corporates exist within the ecosystem of the market and hence what moves the market moves
them as well. So, the factors that direct corporate behavior are often found in the market ecosystem that
is prevalent in a particular country of region.

Corporate Governance and Financial

Crisis
The ongoing financial crisis has proved that Corporate America and the Corporates in other countries
around the world have exhibited behavior that can be described as mismanagement and not keeping in
tenets of good corporate governance. In this respect, some of the criticism that has been directed at
corporate leaders and the bankers in particular appears to be justified given the excesses that have been
on display from them. For instance, excessive CEO compensation is a hot topic in the aftermath of the
global financial crisis.

Studies have shown that the CEO’s of some companies like Wal-Mart and GM along with Wall Street
Banks take home pay that is 100 to 150 times the average pay of the working class. This is indeed a fact
that speaks volumes about the blatant disregard for fair compensation and reflects the skewed priorities
of the corporate leaders. After all, what can possibly justify this huge imbalance even after taking into
consideration the fact that CEO’s and Bankers are engaged in activities that are cerebral and visionary in
nature?

The answer from corporate chieftains is that while these levels of gap between the CEO pay and the
average pay are indeed troubling, there is no need to panic since the trickle down economics that they
rely on means that the wealth eventually finds its way to the bottom. It is another fact that this has not
happened so far in practice and what we have instead is a rising inequality gap. The reason for pointing
this aspect is to highlight the kind of corporate governance practices that have seeped into corporates
around the world. The point here is that one reason why the global financial crisis happened was
because of the failure of the very vision and direction as well as misplaced faith in markets for
which these CEO’s and Bankers were being paid such humungous amounts. Hence, the notion that
this aspect reflects good corporate governance has fallen flat on the face.

Another aspect of corporate governance that underlines the ongoing financial crisis is that there
were serious issues of transparency and accountability concerning the behavior of the corporate
leaders. When they overwhelmingly make the rules that benefit them at the expense of the shareholders
and the stakeholders, then there is something wrong with the kind of corporate governance being
performed. The fact that the employees in these companies and banks along with the shareholders had
to pay the price for the mismanagement of the corporate leaders indicates that there is an urgent need to
clean up the stables of corporate governance before it is too late.

Finally, the issues related to pursuit of profits at the expense of social and environmental concerns points
to another malaise of the current systems of corporate governance. Hence, taken together these aspects
reflect the fact that the current models of corporate governance need a rethink especially when one
considers the fact that the global financial crisis was brought about due to excessive greed and reckless
risk taking. The bottom line is that corporate leaders must be answerable to the regulators and the
shareholders along with the stakeholders and only when there are effective checks and balances to keep
the corporate governance on track can we avoid crises like the ongoing global financial crisis.

Corporate Governance after the

Financial Crisis and the Emerging Best
Practices
In previous articles, we have discussed how the global financial crisis forced a rethink of corporate
governance practices. To start with, the global financial crisis brought into focus the unfettered greed and
uncontrolled risk taking that characterized the global financial crisis. These were symptoms of the crisis
that happened because of poor corporate governance. Added to that was the inability of regulators to
provide oversight over the actions of the banks and corporates and the humungous amounts spent by
banks to lobby for less oversight and control over their actions. Hence, it can be said that the underlying
reasons for the crisis were poor banking practices and lack of transparency and accountability by the
corporates.

In the wake of the crisis, several proposals aimed at introducing greater transparency and accountability
from the corporates have been set in motion. These include the Dodd-Frank Act or the legislation that has
been passed in the US to monitor the accounting and business practices of the banks and corporates.

Further, the Consumer Protection Agency under Elizabeth Warren has taken a series of steps to restore
consumer confidence and to bring back the trust that suffered as a result of the crisis. The bottom line
requirement for good corporate governance is that the shareholders and the consumers must have
implicit and explicit trust in the actions and reporting of corporates. Hence, any move towards increasing
transparency and accountability has to be done in a manner that makes the stakeholders trust the
actions. The point here is that credibility and integrity is the key to successful corporate governance.

The emerging best practices include stricter regulatory requirements, reporting done in a transparent and
ethical manner and fair business practices aimed at servicing the small consumer as well as the large
institutional shareholders. The legislation mentioned above along with the slew of measures that have
been collectively called Wall Street Reform are aimed at reining in the rapacious and reckless behavior of
the banks and financial institutions. Further, since the crisis was thought of as an assault on capitalism
itself, it became necessary for the reformers to focus on the aspect of investigating the ideas and theories
underpinning capitalism.
Finally, there has been some movement towards instituting best practices though the pace has been slow
because banks have been resisting these reforms. It needs to be mentioned that human ingenuity knows
no limits and hence, unless there is voluntary compliance, we would always find ways and means to
circumvent the rules and regulations. Hence, more than anything else, a mindset change is needed from
the corporates to set in process patterns of corporate behavior that are sustainable and socially and
environmentally conscious. Only when there is a desire to change from within can the best practices
work.

In conclusion, the global financial crisis shook the very foundations of capitalism and laid bare the
tenets and the wrong assumptions under which the market based system was working. Hence,
after the crisis, the attempt at reform though slow has still been noteworthy because the size of the task at
hand is ambitious and fraught with dangers. It is hoped that the crisis would serve as a valuable learning
experience for the corporates to mend their ways and to avoid a repeat of such occurrences.

Broadening the Corporate Governance

Agenda: The Corporate Social
Responsibility
In recent years, there has been an increasing emphasis on governing corporations according to social
and environmental norms and ensuring that the negative externalities associated with them are
minimized. When we talk about negative externalities, what we mean are the social and environmental
costs that corporations impose on society and which are not factored into the costs incurred by them.
Since these affect society without the corporations paying for them, there is a need for the corporations to
be socially and environmentally conscious and responsible so as to minimize inconveniencing society at
large. This is the paradigm of corporate social responsibility or CSR which indicates the need for
corporations to follow sustainable business practices.

In the context of corporate governance, CSR means that corporations have to take into account
society and the environment as stakeholders and cater to their needs instead of just pursuing
profits at the expense of everything else.

The point here is that corporate governance must include aspects of social and environmental
responsibility and this is where CSR comes into the picture. By including CSR within the ambit of
corporate governance, it is hoped that corporates would govern themselves and be accountable for their
social and environmental costs. Thus, by broadening the ambit of corporate governance by embracing
CSR, it is hoped that corporates would be responsible towards society and the environment.

To take examples of how corporate governance has been impacted by CSR, there are many cases of
corporates like Samsung, Hyundai, Unilever and P&G (to name a few) that are publishing their CSR
reports along with their annual reports. This is a direct consequence of the push to broaden the corporate
governance agenda by including CSR within its ambit. Further, many corporates now routinely report how
much cost they are imposing on society (the negative externalities) and their efforts towards minimizing
them. Moreover, corporate governance is no longer just about transparency and accountability within the
business framework. Instead, it has been broadened to include the whole gamut of social and
environmental concerns that make up the corporate governance agenda.

In recent years, multilateral bodies like the United Nations and WTO have established normative rules of
conduct under classifications like the UN Global Compact that bind organizations to social and
environmental responsibility and formulate a set of guidelines that these corporations can follow. There
are many corporates who are signatories to the UN Global Compact and it is expected that the
guidelines, though voluntary, would be followed by the corporates as part of their sustainability drives.
Finally, it is indeed the case that there needs to be a combination of voluntary and enforced rules of
conduct and behavior that corporates are expected to follow as part of their social responsibility related to
corporate governance. Hence, we have reached a stage where if the voluntary guidelines do not work,
multilateral bodies like the UN has a duty to enforce them so that society as a whole is better off.
Including social and environmental concerns as part of a corporate governance agenda is a good thing.
However, there needs to be a mechanism that tracks compliance with these principles as well.

In conclusion, corporate governance is no longer just about ethical practices pertaining to

business processes alone. Instead, the corporate governance agenda has been broadened to
include social and environmental norms as well.

The Role of Institutional Investors in

Promoting Good Corporate
Governance
We have discussed how corporate governance and the practice of ethical and normative business
practices are essential for companies to stay the course and reap longer term benefits. In this article, we
look at how institutional investors or the investors who are not individuals but large fund
managers and investment houses play a major role in promoting good corporate governance.

At the heart of the issue about institutional investors and corporate governance is the fact that there is
something called an agency problem that creeps up with professionally managed organizations. What this
agency problem indicates is that managers have conflicting responsibilities to themselves and the
organization and in most cases; they seek to promote their interests at the expense of the organization’s
interest. The point here is that managers by nature seek to maximize their benefits in relation to the
profits and hence there is a need for counterbalancing this with other forces.

These forces or the countervailing balance is brought about by the institutional investors who have an
interest in promoting the longer term health of the company. By actively pursuing the boards of
organizations to follow effective corporate governance, institutional investors would ensure that the
corporates put the longer term interests of the organization as well as ensure that organizations put
shareholder interest over the interests of the managers. The point here is that institutional investors often
represent large chunks of shareholders and hence they can be an effective check to the tendency of the
managerial class to put their own interests first. The other aspect relates to the way in which they can
monitor the health of the organization because they have the necessary expertise and knowledge in
running organizations since they sit on the boards of other companies as well.

The third aspect of institutional investors is that they are more effective than minority shareholders or
small shareholders. In most annual general meetings, we can see small investors raise questions related
to corporate governance. In some cases, these concerns are addressed whereas in most cases, the
small shareholders despite voicing objections are overruled because they do not have the numbers. This
is where institutional investors come into the picture since they represent humungous numbers of
shareholders and hence have the bargaining power needed to make a difference. Of course, the flipside
to this is that institutional investors do not usually pursue radical changes and instead focus on
maintaining the financial and operational efficiencies of the organization and promoting good corporate
governance.

Finally, institutional investors can be a rock of stability in turbulent times as was evident during the recent
crisis over Coal India. This case where the PSU was trying to override many objections of the
shareholders was thwarted in its attempts because of the activism of the institutional investors. Further, in
the case of Vedanta, institutional investors made sure that the company followed social and
environmental norms and did not ride roughshod over its obligations to society and the government.

Need for a Uniform International

Corporate Governance Code
With the globalization of the world economy starting in the 1970s, continuing through the 1980s and
accelerating since the 1990s reaching its zenith in the first decade of the new millennium, there has been
a concomitant trend of global corporations expanding their international footprint and operating in multiple
countries around the world.

This meant that they had to deal with a maze of regulations and laws and procedures, which were
different in each country, as well as being unique to each country.

Further, with the codes of corporate governance in the West (especially the United States and Europe)
being deep, structured, and comprehensive, compared to those elsewhere, which were still in the process
of evolving, the situation was such that global corporations had to do with dealing with different yardsticks
in regional and country specific terms.

If this were the only imperative, then investors, activists, and regulators would not have bothered since
this was the domain of the global corporations and something, which they could handle.

However, given the fact that bribery and corruption are rampant in the Third World meant that global
corporations could truthfully assert that they were not breaking any laws as far as their home
countries’ and their rules were concerned. Instead, could resort to underhand dealing in the rest of
either the world where corporate governance was yet to be evolved or the regulation lax.

This situation was compounded by the fact that there were many corporate scandals in the last two
decades arising out of corporate mis-governance and malfeasance from companies such as Enron,
Parmalat, WorldCom, and the recent instances of dubious practices that were revealed in the aftermath of
the Great Recession of 2008.

These placed the spotlight squarely on the activities of the global corporations around the world, which
led to calls from regulators and activists of the need for global corporations to be brought under the ambit
of a uniform and consistent corporate governance standard around the world.

For instance, it is the practice in Germany to have representatives from the labor unions on the boards of
corporations. Moreover, in many Asian countries, it is the practice for family members and relatives of the
owners of the firms that are family owned to find places in the boards. Apart from that, in China, it is the
law that officials from the Communist Party be made members of the boards. Therefore, taken together
these examples point to the difficulty of having a uniform code of corporate governance that is applicable
internationally.

Having said that, it must also be noted that unless global corporations are regulated by an international
code of corporate governance, they are more likely to succumb to the temptation to cut corners in those
areas of the globe where regulation is weak. In addition, they would have to comply with purely local rules
and regulations that might impede their smooth operation.

Apart from this, the increasing incidence of corporate scandals means that the shareholders stand to
lose the most in addition to the broader societal stakeholders and hence, there is indeed a need to make
the global corporations adhere and conform to the same standards that they follow back home.
Therefore, as mentioned earlier, this article argues that there is indeed a case to make for an international
code of corporate governance despite the difficulties of actualizing it in practice.
This means that global corporations while thinking globally have to act locally which when taken together
means that they must be Glocal in their approach, which is another theme that runs concurrent to the
main themes in this article.

This can be applied to the international code of corporate governance wherein global corporations are
made to observe those rules and regulations that are global in nature, adapt, and adjust to the local rules
and regulations in a Glocal manner thereby increasing the viability of an international code (Wharton.edu,
2014).

To take the example of Fidelity International or Vanguard investments that are increasingly diversifying
out of the US stocks into international companies, they must be reassured that the companies that they
are investing in are reasonably and relatively well governed when compared to the corporations in the
United States and Europe.

This means that their equity investment strategies must focus on the accounting standards in various
countries in which they are investing. These must be complaint with the provisions of corporate
governance codes such as Sarbanes-Oxley, Cadbury rules, OECD (Organization of Economic
Cooperation and Development) guidelines, the ICGN (International Corporate Governance Network)
which are some of the global regulatory codes that would be discussed in this article.

The central focus of corporate governance in any country is on the board of directors and the structure of
the corporate board. Therefore, when international investors invest in say, a company in Italy or Lithuania,
they must be convinced that the respective boards are in conformance with global corporate governance
codes. This makes the case for an international code of governance that much stronger.

However, as mentioned earlier, the specific rules in place in many countries around the world makes it
more difficult for uniform application of corporate governance that follows the Sarbanes-Oxley guidelines
of reporting and disclosure which means that the move towards an international code of governance
would run into difficulties.

In other words, just as globalization ensures a creative dialogue between East and West and arrives at a
meeting point, similarly, corporates around the world can make strides towards actualization of global
norms adapted to local conditions that can result in a win-win situation for both.

Ultimately, the driving force for any international code has to come from the borderless attributes
of global capital that seeks the maximum returns for the lowest costs and emphasizes efficiency
and productivity. In other words what this means is that by ensuring that markets do their best when
confronted with a problem, capitalism can find a path forward that would solve the problem of differing
standards of corporate governance around the world.

Further, in recent years, global investors too have veered around to the view that they might have to
abide by different rules in different countries. Of course, the implicit assumption here is that as long as the
rules do not change suddenly, they are fine with separate reporting, board structures, and laws related to
shareholding and equity control.

The discussion so far has debated both sides of the issue as to whether an international code of
corporate governance is viable. The key themes and the insights that have animated the discussion point
to the fact that as long as there are different cultures, there tends to be diversity and hence, it is indeed
the case that celebrating differences and actualizing homogeneity must go hand in hand.

Therefore, wherever possible there can be convergence in the adoption of uniform codes of governance
and the differences can coexist with the agreements. This has been the case with other multilateral
bodies such as the WTO (World Trade Organization) and the United Nations, which have been somewhat
successful in respecting national sovereignty in the midst of global cooperation and coordination.
In concluding this article, it would be pertinent to note that the final argument being made in this article is
that as long as the demands of global capital towards transparency and accountability being more
profitable are concerned, individual differences related to local conditions can be co-opted and embraced
within the ambit of an international code of corporate governance.

Therefore, without either ruling out the viability of such a code or insisting upon the adoption of the same,
this article makes the point that letting the winds of the world breeze into the rooms without being swept
off one’s feet by them would be a good metaphor to describe how an international code of corporate
governance would work in practice.

The Role of the Independent Directors

With the explosion of scandals pertaining to corporates due to mismanagement and fraud in recent years,
the regulators all over the world have been implementing a series of policies aimed at improving
corporate governance and ensuring that companies follow ethical and normative rules of business. A part
of this initiative has been to goad the companies to nominate a certain percentage of their board to
persons who are not affiliated to the company. These are the so-called independent directors who sit
on the boards of companies in a purely professional manner without having a hand in the day to
day running or other activities of the company.

The point about the independent directors is that they are drawn from a pool of professional who have
had wide industry experience and are qualified to sit on the boards of the companies. What makes this
process appealing to the regulators is that these independent directors can bring the much needed
perspective that is objective and balanced since they are not connected to the company nor its
management and hence do not have hidden agendas.

In India, SEBI and the Corporate Affairs Ministry have decreed that between 10-15 percent of the
composition of the board must be made up of independent directors. This move is aimed to bring in more
objectivity to the art of corporate governance and introduce transparency and accountability from the
directors who are drawn from the ranks of the management. This rule has been enforced given the spate
of corporate scandals like Satyam where the top management itself indulged in fraud and dubious
business practices. So, the line of thinking goes that bringing in independent directors would usher in
greater oversight over the functioning of these companies. Since the Satyam Scandal was because of the
board looking the other way when its founder was indulging in defrauding the company, the Ministry of
Corporate Affairs is implementing this rule to introduce greater oversight.

In the US, independent directors have been known to bring in a fresh perspective as well as check the
runaway business behavior dictated by profits and personal benefit. In many companies in the US, the
independent directors are the ones who often thwart the management from taking decisions that are
based on personal benefit as opposed to the interests of the shareholders. Further, independent directors
are tasked with investigating cases of corporate malfeasance and unethical behavior because of their
supposed objectivity. However, there have been instances where the independent directors themselves
acquiesced in the wrongdoings of the companies and their boards. The solution to this has been the
initiative to make the independent directors responsible for the actions of the board so that they have a
stake in ensuring that the board does not tread on the wrong side.

Finally, independent directors also bring in the much needed professional expertise since they are
individuals with wide experience in running companies as well as the fact that they sit on the boards of
other companies which means that they are abreast of the latest happenings. There has been a move by
the regulators in many countries to ensure that independent directors do not have conflicts of interest and
these have been codified into rules governing how many companies they can associate themselves with
and the sectors and industries that they represent.
Introduction to the Concept of Board of
Directors
Any public limited or private company needs to have a board of directors constituted for the purpose of
oversight and accountability to the company. The concept of the board of directors is that it provides an
umbrella for the company to operate in and ensures that the decisions and actions taken by its
management are reviewed and held to the mirror. The reason for the existence of the board of directors is
that there needs to be a body that is above the management and which can be accountable to the
regulators and shareholders for the decisions taken by the management of the company. Hence, it is
common to find many members of the management sitting on the board as executive directors. Again, it
is for this very purpose that the regulators deem the company to have a certain percentage of directors in
the non-executive capacity and those who are independent.

In recent years, the concept of the board has become crucial for corporate governance because of
the incidence of several corporate scandals involving unethical conduct by the management.

In some of these cases like the Enron scandal and the Satyam scandal in India, the board was found to
have played a major role in facilitating the scandal. This has led to the regulators asking for greater
oversight from the board and to make the board accountable to its shareholders. Of course, there are
many instances that prove the contrary where the board has stepped in to stem the rot that the
management has through its actions engendered. Prominent among these are the actions of Reebok in
recent months where the board asked the top leadership to resign in the wake of corporate scandals
involving them.

The concept of the board has been introduced explicitly to ensure that ethical and normative rules of
conduct of corporate governance are followed. The point here is that since the buck stops with the board
of directors, shareholders and regulators know who to turn to in case they have queries or doubts about
the decisions taken by the company. In many cases, the board of directors acts as the ombudsman as
well for shareholder complaints and grievance redressal. Further, the board of directors is comprised of
individuals with exemplary records of managing companies and hence it is expected that the board of
directors would provide technical and managerial guidance to the way in which the company is run.

Finally, the concept of the board of directors is also important for the way in which it is deemed to play a
pivotal role in providing good corporate governance. In most cases, the way in which the company is
governed depends on the way in which the board directs the management in its operation of the
company. This is relevant to the contemporary times where the managerial class has been found to
enrich itself at the expense of the company and its shareholders. It is for this reason that the board of
directors is expected to steer the company away from agency problems, conflicts of interest and
asymmetries of information in the way shareholders are briefed about the decisions taken by the
company.

The Role and Duties of the Board of

Directors
Any public limited or a private company needs to have a board of directors which would ratify the
management decisions taken by the leadership. These decisions can be financial or operational that
affects the day to day running of the company. Further, the board of directors is expected to give a
direction to the company in terms of strategic and visionary terms as to how the company expects to grow
without having to abandon the ethical and normative rules of conduct. Note the emphasis on the term
ethical and normative rules as the board of directors is the final arbiter of decisions taken by the company
and hence, they must only approve a certain decision only when they are convinced that it would be in
the best interests of the company and its shareholders.

The board of directors is often held responsible for the decisions taken by the company and
hence, it is answerable to the shareholders as well as the regulators. In this context, it becomes
necessary for the board of directors to be composed of individuals of exceptional abilities and leadership
traits as well as being visionary.

The role of the board of directors can be summed up in one single sentence: the buck stops with them
and hence they are the final authority as far as the company is concerned. The duties of the board of
directors are similarly to be the ones who would take the decisions that have the stamp of authority and
hence become the yardstick by which the company is judged.

Apart from these roles and duties, the board of directors is also answerable to the shareholders and the
regulators. So, this means that the board of directors must take decisions that are in the larger interests of
the shareholders and they must protect the interests of the shareholders at all costs. Further, whenever
there is a scandal in the company, the regulators write to the board of directors so as to elicit information
on what happened. For instance, when the Satyam scandal broke, the regulators and the press turned to
the board of directors for guidance and information. It is another matter that in this particular case, the
board was compromised as well.

This brings us to the final aspect that the board of directors has to have a coherent approach towards
managing the company and hence, must be consensual in its decision making. Unless the board of
directors agrees on decisions either unanimously or through a majority vote, there cannot be movement
for the company. Hence, it is clear that boardroom battles and directors with hidden agendas be avoided
to the extent possible in the larger interests of good corporate governance. Since the board has the final
say in matters concerning the company, the CEO and the leadership have to present the information
truthfully and accurately. In the case of Satyam, there were allegations that the CEO and some of the
compromised members of the board kept the other directors in the dark about some key decisions. This
should not be allowed to happen.

The Relationship between the Board of

Directors and the Management
The relationship between the board of directors and the management cannot be described as just being
that of a relationship between an employee and his or her manager. Though the board oversees the
decisions taken by the management and ratifies them along with acting as the final arbiters of the
strategic direction and focus that the company is heading into, the relationship goes beyond that. For
instance, the board of directors is responsible for the actions of the management and hence not only does
the board need to monitor the management, the management needs to take the board into confidence
about its decisions. Hence, the relationship can be described as being symbiotic with each with each
serving in an ecosystem called the organization. The point here is that neither the management nor the
board can exist without each other and hence both need each other to survive and flourish.

Another aspect to the relationship between the board and the management is that more often than not,
there is a significant representation of the management in the board. This means that the other board
members have to study the decisions taken by these members carefully so that there are no agency
problems, conflicts of interest and asymmetries of information.

Only when the board and the management coexist together in a harmonious manner can there be true
progress for the organization. For this to happen, there must be a provision for having independent
directors and those directors that are not affiliated to the management. The point here is that unless there
is objectivity and separation of the directors belonging to the management and those from outside can
there is a semblance of avoidance of conflict of interest.

The third aspect of the relationship between the board and the management is the role played by
institutional investors or directors from large equity houses and mutual fund companies. These directors
bring to the table rich and varied expertise and experience in running companies and hence their input is
crucial to the working of the company. It is for this reason that many regulators insist on having a certain
percentage of the board as independent directors and another percentage from institutional shareholders.
The reason for this is the fact that unless there is a process of due diligence and oversight over the
actions of the management, the management can take unilateral decisions that are not always in the best
interests of the company.

Finally, the relationship between the board and management is somewhat strained whenever the
company is not doing well. This happens because the board has a top view of the organization
and the management has a deeper insight. Hence, to be fair to the management, they are the ones
who have to run the organization and so they cannot be constrained by what the board dictates sitting on
its perch. This is the classic problem that many companies face especially when they are not doing well
and the remedy for this is to take the board into confidence about the complexities of the day to day
operations and apprise them of the nuances and subtleties of running the organization.

Corporate Governance and

Expectations from the Management
The field of corporate governance exists in a symbiotic relationship between the management and the
board of directors. It is impossible to talk about corporate governance without taking into account
the roles and duties of the board of directors and the expectations from the management. To
explain this fully, it would be useful to consider the fact that unless the board of directors’ act as oversight
authority effective corporate governance cannot be practiced. In the same vein, unless the management
sets their expectations from the board of directors, the latter would not be able to function. Hence, the
expectations from the management ought to be articulated upfront for the board of directors to know and
understand what they are supposed to do. This often manifests itself as a written or unwritten code of
conduct for the board of directors to follow.

The expectations from the management can take many forms and they can be divided into
oversight over their actions, guidance from professional directors on how to run the company and
finally, a sharing of accountability and responsibility between the management and the board of
directors.

If we take each of these by turn, we find that the board of directors is expected to perform the role of an
oversight over the actions of the management and that the board should be accountable for its actions. In
recent months, in the AMR fire tragedy and the Satyam Scandal, the board was widely believed to have
reneged on its oversight functions. Next, the board of directors is expected to provide professional advice
and guidance to the management and the expectations of the management include sagacious and timely
advice to the management from the professionals on the board on how to run the company.

The point here is that the expectations from the management cover these dimensions and a harmonious
relationship between the board and the management can exist only when these dimensions are taken
care of. Further, the management cannot shirk its responsibility and hence apart from their expectations
from the board, they are also deemed to behave in a manner that inspires confidence from the employees
and other stakeholders. In recent years, there has been much heartburn among investors and the
stakeholders in the way in which the boards of several companies are acting as rubber stamps for the
management. This trend is to be avoided and only when the board acts independently and as a custodian
of shareholder and stakeholder interests can there be effective corporate governance.
Finally, the expectations from the management need to be reevaluated and reoriented periodically so that
the management and the board of directors are on the same page and they have the employees and the
stakeholders with them. The bottom line for effective corporate governance is a healthy balance between
the expectations from the management and the functions of the board. They have to balance each others’
needs and responsibilities and have to coexist if meaningful corporate governance is desired.

The Responsibilities of the

Shareholders
Any public limited or private limited company has shareholders who contribute capital towards the setting
up and running of the company. While in the case of private limited companies, the shareholders are
usually the promoters and a few close friends or family, the public limited companies have a large body of
shareholders drawn from all walks of life. The shareholders of any company have a responsibility to
ensure that the company is well run and well managed. They do this by monitoring the performance of the
company and raising their objections or giving their approval to the actions of the management of the
company. Whereas many shareholders act through institutional and large investors as their
representatives, minority shareholders have the option of expressing either their disapproval or
agreement at the Annual General Meetings of the companies.

The concept of having shareholders for the companies is to make the companies accountable for their
actions. As mentioned above, the shareholders are usually represented on the board of directors and the
board of directors acts as the custodian for shareholder interests.

In cases where the board is not acceding to the requests of the shareholders, the shareholders can act
directly by asking the management to convene an extraordinary general meeting so that they can voice
their opinions. In recent months, the Indian IT bellwether, Infosys has been facing the heat from the
shareholders because of its huge cash reserves where the shareholders have demanded that the
company buyback some of the shares to compensate for the declining dividends and falling stock prices.

In the West, shareholder activism is usually in the form of putting pressure on the board and the
management to take decisions that are in line with environmental, social and ethical norms and this is
reflected in the way the global multinational, Vedanta, was forced to drop some controversial projects in
India because its shareholders in the UK objected to this on humanitarian grounds. The point here is that
left to themselves, the managements of companies might act in ways that would enhance their personal
benefit at the expense of the company. This is where shareholders play a crucial role in mediating
between the agency problems and issues of conflict of interest along with asymmetries of information.

For instance, in the recent past, the Public Sector Coal India has been forced to explain several of the
decisions taken by its management and the board of directors because of objections raised by the
shareholders. The examples that have been cited in this article point to the fact that shareholders can
indeed influence the outcomes that the board and the management take on their behalf. Further,
shareholders have a responsibility towards society as well since the companies that they have invested in
cannot be allowed to flout ethical and social norms. Hence, the responsibilities of shareholders are
many and varied and some of them have been touched upon in this article.

In conclusion, shareholders are increasingly demanding a greater say in the conduct of the companies
where they have invested and this is a good sign.

The Shareholders Ownership

The previous articles discussed how shareholders play an important role in promoting good corporate
governance. This article looks at the patterns of shareholder ownership that are prevalent in organizations
in the corporate world. To start with, any company whether it is private or public limited needs to have
shareholders who contribute equity to the setting up of the company and who in turn trade the shares so
as to enhance the market value of the firm. In this way, shareholders exercise ownership over the
company with their stake in the company.

The forms of shareholder ownership can be in many ways and some of them include outright
control of the company by the majority shareholders, participation on the board of directors in
proportion to their holding in the company and finally, being minority shareholders in a company
and having voting rights accordingly. These patterns of shareholder ownership are more or less
followed all over the world.

Turning to the aspect of exercising control over companies, shareholders often resort to having their
representatives on the board of directors who would then see to it that the interests of the shareholders
are being taken care of. This is the dominant view of the shareholder ownership where the numbers and
the way in which a majority stake is held by a particular shareholder bestow ownership rights to the
shareholders. Of course, theoretically speaking, all shareholders are owners of the companies and
accordingly have power over the actions of the company. However, in practice, it is usually those with the
greater numbers who exercise control over the companies. Hence, it can be said that shareholder
ownership follows democratic principles wherein the largest shareholder has more control than the
minority shareholders.

It is often the case that shareholder ownership is seen as a phenomenon that is fraught with risk. This is
because the shareholders by virtue of their holdings represent ownership which can also boomerang if
the company goes belly up. What we mean is that since shareholders are owners of the companies, in
case of failure they take the hit as well. This is not the case with those who own debentures and bonds in
the companies. Hence, it is the shareholders who are liable for risks. On the other hand, as long as things
are going fine, it is the shareholders who reap the rewards for their holdings and their risk taking behavior.

Finally, shareholder ownership is a phenomenon that allows for fair corporate decision making and a
sense of responsibility and shared risk taking. The point here is that without a body of investors who
would be willing to invest in a company, the promoters might not be able to raise the capital that is
needed for the firm. Further, the risk is spread out over more numbers rather than the promoters having
to shoulder the entire burden. In these ways, the shareholder ownership has evolved to the point where it
has become a prerequisite for good corporate governance.

A Comparison between Shareholder

Ownership and Control
In previous articles, we discussed the roles and responsibilities of the shareholders. In this article, we look
at the distinction between shareholder ownership and control and illuminate how this comparison plays
out in the corporate world. To start with, many public limited companies have a large body of
shareholders who have invested in the company and contributed to the setting up of the company and
running it.

However, shareholder ownership does not imply control since the company law makes it clear that
only a majority percentage of the shareholders can exercise control. The point here is that to have
effective say over the running of the company, a majority vote of the shareholders is necessary following
the democratic norms of participation that govern companies.

Hence, for all purposes, it is clear that whenever and wherever shareholders gather the necessary
majority of votes, they would also have control over the company.
Theoretically, shareholders own the company and hence the company ought to be run according to the
dictates of the shareholders. However, in practice, there would be significant differences of opinion
among shareholders and this leads to a situation where arriving at a consensus is not possible. Hence,
the provision that there needs to be a majority percentage of the shareholders to have effective control or
say in the decision making of the companies has been established. This is also the case with any
decision that is taken by the board of directors and the shareholders as control is in the hands of those
who can drum up the required numbers of votes. This is the crucial distinction between shareholder
ownership and control that is practiced in the real world.

However, this is not to say that shareholder control always needs a majority of votes. For instance, there
can be cases where many shareholders cede their access to other shareholders who can then act on
their behalf. Further, institutional shareholders represent voting blocs who can have a greater say in
running of the companies than the minority shareholders. It is these differences that are at the heart of the
debate over shareholder ownership and control which determine the nature of control that is exercised in
the corporate world. The point here is that shareholders are the owners of the company and hence, they
have a right to control the company. However, as in any democracy, they need to have the numbers on
their side to have a say in the running of the company.

Finally, in recent years, there has been an upsurge of shareholder activism mainly due to the fact that
many corporate scandals have emerged leading to unease among the shareholders. So, it is indeed the
case that shareholder control is necessary to prevent the management and the board from taking
decisions unilaterally that are not in the best interests of the shareholders. In conclusion, it is the case
that shareholders be vigilant and are the custodians of their own interests rather than being passive and
let the board or management decide on their behalf.

Should Long Term Shareholders Have

Double Voting Rights ?
The long term success of a company depends on the decisions made by its management. The
appointment of management is done by the shareholders. However, the problem is that shareholders are
considered to be one homogenous group. This is not an accurate reflection of reality. Different kinds of
shareholders invest in a company. Some shareholders intend to hold on to the shares for a longer
duration of time whereas there are others who would hold on to the shares only for a few days and in
some cases just a few minutes.

The rule of law in most countries provides shareholders with equal voting rights no matter how
long they hold the shares for. A decade old shareholder has the same rights as a day old shareholder.
Proponents who endorse long term right to vote find this unfair. This is because short term shareholders
are often speculators. They have nothing to do with the long term interest of the company. Since they
have an equal vote, they end up distorting the company’s value creation process.

Case in Point

The French government has introduced differential voting rights in their companies. This means that
shareholders who have held the stock for more than 24 months are listed down in what is called, the
“loyalty register”. These shareholders have twice as much voting power as an average shareholder.
These differential rights are the de facto standard for every company unless they decide to opt out of the
process by mentioning it in their articles of association. A similar law is being introduced in Italy as well.
Investors all over the world have opposing views regarding this law.

It must also be noted that the shareholders of major companies like the French carmaker Renault have
overwhelmingly voted in favor of “one share one vote”. A similar case happened at L’Oreal where more
than 95% of the shareholders voted in favor of maintaining the “one share one vote” rule.
Since the issue of loyalty dividends and loyalty shares requires a special majority i.e. 75% vote in Italy, no
major Italian company has implemented these rules as of now.

While some believe that this law is a boon for the shareholders, other think it is a bane. In this article, we
will understand both these points of view.

Benefits of Differentiated Voting Rights

 Avoids Hostile Takeovers: Differentiated voting rights make some class of shareholders more
important than the others. This will make hostile takeovers almost impossible. Hostile takeovers
are done by buying shares on the open market in a short span of time. However, under this law
when shareholders change, the voting rights will be halved. Hence, acquisition of 50% of the
shares will only provide 25% of the voting rights. Many governments are supporting this law
because it would prevent corporate vultures from taking over companies and causing significant
unemployment.
 Encourages Long Term Ownership: Differentiated voting rights encourage long term
ownership. They provide a serious incentive for the people not to sell their shares. It also creates
a disincentive for the buyers as they do not get equal voting rights. Some countries are even
proposing that the older shareholders be given a special rate of dividend to compensate for their
loyalty. Long term share ownership is the platform required to build stable companies as the
management would not be distracted by obtaining short term results to pacify some stakeholders.

Disadvantages of Differentiated Voting Rights

 Minority Rights: The problem with differentiated voting rights is that it negatively impacts the
minority shareholders. The larger institutional investors tend to hold shares for a longer duration
of time. Hence, they are the ones that will get double voting rights. This will further entrench their
already significant moats. On the other hand, minority shareholders do not tend to hold on to
shares for very long. Since they will have very little say in the running of the company, it is likely
that their capital will be exploited and that they will be marginalized as a group.
 Effects Liquidity: Another major issue with differentiated voting rights is that it affects the
liquidity of the stock. Stocks are sold on the basic premise that they are liquid and that there will
always be a ready market available in case the investor wants to convert the stock to money. The
introduction of these voting rights hampers this process. Newer shareholders will not get an equal
vote. Hence, they will be reluctant to buy. Older shareholders would also have a significant
reason not to sell. This would create an artificial scarcity of stocks which will hamper the free
functioning of the market. Theoretically, there should be zero transaction costs for a market to
function freely. The imposition of significant costs will distort the prices and negatively impact
liquidity.

To sum it up, differentiated voting rights is a complex issue. There are significant pros and cons to be
analyzed in this case. However, the “one share one vote” rule has been entrenched in the corporate
culture for very long. Changing this rule will require a lot of influence and will lead to a lot of short term
mayhem in the market. Instead of the government making the decision on the company’s behalf, each
company can be given the right to decide on its own.

Book Building Process - How Are

Prices of Shares Decided in an IPO ?
Companies all over the world use either fixed pricing or book building as a mechanism to price their
shares. Over the period of time, the fixed price mechanism has become obsolete and book building has
become the de-facto mechanism used in pricing shares while conducting an initial public offer (IPO). In
this article, we will study how book building process works i.e. how are shares priced in an IPO:

What is Book Building ?

Book building is a price discovery mechanism that is used in the stock markets while pricing securities for
the first time. When shares are being offered for sale in an IPO, it can either be done at a fixed price.
However, if the company is not sure about the exact price at which to market its shares, it can decide a
price range instead of an exact figure. This process of discovering the price by providing the investors
with a price range and then asking them to bid on it is called the book building process. It is considered to
be one of the most efficient mechanisms of pricing securities in the primary market. This is the preferred
method which is recommended by all major stock exchanges and as a result is followed in all major
developed countries in the world.

Book Building Process

The detailed process of book building is as follows:

1. Appointment of Investment Banker: The first step starts with appointing the lead investment
banker. The lead investment banker conducts due diligence. They propose the size of the capital
issue that must be conducted by the company. Then they also propose a price band for the
shares to be sold. If the management agrees with the propositions of the investment banker, the
prospectus is issued with the price range as suggested by the investment banker. The lower end
of the price range is known as the floor price whereas the higher end is known as the ceiling
price. The final price at which securities are indeed offered for sale after the entire book building
process is called the cut-off price.
2. Collecting Bids: Investors in the market are requested to bid to buy the shares. They are
requested to bid the number of shares that they are willing to buy at varying price levels. These
bids along with the application money are supposed to be submitted to the investment bankers. It
must be noted that it is not a single investment banker who is engaged in the collection of bids.
Rather, the lead investment banker can appoint sub-agents to tap into their network especially for
receiving the bids from a larger group of individuals.
3. Price Discovery: Once all the bids have been aggregated by the lead investment banker, they
begin the process of price discovery. The final price chosen in simply the weighted average of all
the bids that have been received by the investment banker. This price is declared as the cut-off
price. For any issue which has received substantial publicity and which is being anticipated by the
public, the ceiling price is usually the cut-off price.
4. Publicizing: In the interest of transparency, stock exchanges all over the world require that
companies make public the details of the bids that were received by them. It is the lead
investment banker’s duty to run advertisements containing the details of the bids received for the
purchase of shares for a given period of time (let’s say a week). The regulators in many markets
are also entitled to physically verify the bid applications if they wish to.
5. Settlement: Lastly, the application amount received from the various bidders has to be adjusted
and shares have to be allotted. For instance, if a bidder has bid a lower price than the cut-off
price then a call letter has to be sent asking for the balance money to be paid. On the other hand,
if a bidder has bid a higher price than the cut-off, a refund cheque needs to be processed for
them. The settlement process ensures that only the cut-off amount is collected from the investors
in lieu of the shares sold to them.

Partial Book Building

Partial book building is another variation of the book building process. In this process, instead of inviting
bids from the general population, investment bankers invite bids from certain leading institutions. Based
on their bids, a weighted average of the prices is created and cut-off price is decided. This cut-off price is
then offered to the retail investors as a fixed price. Therefore, the bidding only happens at an institutional
level and not at a retail level.

This is also an efficient mechanism to discover prices. Also the cost and complications involved in
conducting a partial book building are substantially low.

How is Book Building Better Than the Fixed Price Mechanism ?

First of all, the book building process brings flexibility to the pricing of IPO’s. Prior to the introduction of
book building, a lot of IPO’s were either underpriced or overpriced. This created problems because if the
issue was underpriced, the company was losing possible capital. On the other hand, if the issue was
overpriced it would not be fully subscribed. In fact, if it was subscribed below a given percentage, the
issue of securities had to be cancelled and the substantial costs incurred over the issue would simply
have to be written off. With the introduction of book building process, such events no longer happen and
the primary market functions more efficiently.

Corporate Governance in the West

and the Rest of the World
The previous articles discussed how good corporate governance is imperative to the existence of a
structured and functioning economy. In this article, we look at the ways in corporate governance is
practiced in the developed economies of the West and in the developing economies in the rest of the
world. To start with, the ongoing global economic crisis has dispelled the notion that companies in
the West are governed better.

Given the rather unending charade of CEO’s, Bankers and other corporate leaders being summoned by
the SEC (Securities and Exchange Commission) in recent months over several irregularities, it would be a
long shot to say that the companies in the west practice good corporate governance. Of course, there
was a time when the companies in the West were looked upon as role models for good corporate
governance and this was before the infamous Enron, WorldCom era.

On the other hand, companies in the rest of the world are governed in no better or no worse ways which
means that effectively corporate governance across the world seems to be suffering from a crisis of trust
and credibility. If we take the former Tiger economies of South East Asia or the emerging economies of
China and India and examine the way in which corporates in these countries are governed, it would be
fair to say that most companies owe their growth to crony capitalism and quid pro-pro favors done with a
desire to enrich one another at the expense of the average investor. This has been proved right in the
aftermath of the Asian Financial Crisis in the late 1990’s and in recent months in India and China where
several corporates were charged with duping the regulators.

Of course, one cannot paint all the companies with the same brush and there are exemplary examples of
companies that have practiced good corporate governance in the West as well as the rest of the world.
The point here is that there are bad apples in the system everywhere and hence one cannot tar the entire
system. However, it also needs to be noted that going by the present trends, there is a serious lack of
credibility and accountability as well as issues related to transparency which need to be addressed if we
are to have good corporate governance. Unfortunately, most companies seem to be aping each other in
the way they dupe the regulators and this is a bad trend indeed.

Hence, the need of the hour is a voluntary mindset change as well as some form of regulatory control and
oversight which would restore the art of corporate governance to its pristine status. In other words, it is
time for the corporate entities in all countries to take a hard look at what they are doing and change
course. It is also time for the regulators to enforce the existing laws and regulations so that malfeasance
and deviance from established norms are punished and effective corporate governance is practiced.
Corporate Governance as a Metaphor
for the Economy
In previous articles, we discussed how effective corporate governance is a prerequisite for a well
functioning economy. In this article, we take the point further by highlighting the need for good corporate
governance as a metaphor for how well the economy is functioning. In other words, unless firms in an
economy are effectively governed, the economy itself cannot be well regulated and act in ways
that upholds the principle of social justice.

For instance, with the recent revelations about large scale malfeasance in the corporate sector in the
United States, the economy is low on confidence and investors and shareholders along with the citizenry
have lost faith in what the business leaders and the government says.

In other words, because of the corporate governance scandals involving Wall Street banks, the public has
no longer the faith and trust required to keep the economy running in the interests of the people.

The point here is that as long as the elites keep enriching themselves at the expense of ordinary investors
and the public at large, economies crash since confidence and faith in the system is what keeps an
economy running. This was the case with the Asian financial crisis of 1997 where entire economies were
bankrupted because the oligarchies and the people running the industries and companies benefited at the
expense of the people. And when the music stopped, it was the people who were left stranded without
any source of support. The crucial aspect here is that any economy can function effectively only when its
firms and companies are being managed and run well and hence, effective corporate governance is
almost like a metaphor for a well functioning economy.

The other aspect about good corporate governance is that regulators ought to perform their roles in an
effective manner and unless they do their job well, the corporate governance of companies and firms can
go awry because the people running these enterprises would have the belief that they can get away with
anything. This was what happened in the case of Argentina and the Russia where there was no effective
supervision of the companies leading to crony capitalism and enrichment of tiny elite at the expense of
the majority. Further, even in India, the recent Reebok and Adidas scandal along with the Satyam scandal
have made the point elaborately clear that unless companies are governed well, the economy at large
suffers.

The way this happens is in the form of lost taxes, lost profits and a general sense of lawlessness which is
not good for any economy. And once the rot sets in, it is difficult to stem the tide and hence, it is always
better to nip the problem in the bud. This is the unmistakable conclusion that many experts have reached
wherein they stress the need for good corporate governance to take precedence before anything else.

In conclusion, any economy needs the firms and companies and vice versa and hence this symbiotic
relationship can exist and perform its role well only when there is mutual trust and confidence in the fact
that each side is sticking to the rules of the game. When that trust is eroded, the economy at large suffers
leading to all round misery.

What is Auditing, Its Types, Purposes,

and Some Current Issues
What is Auditing ?

Auditing is the process of assessment and ascertaining of financial, operational, and strategic
goals and processes in organizations to determine whether they are in compliance with the stated
principles in addition to them being in conformity with organizational and more importantly, regulatory
requirements. Indeed, among the objectives of auditing as mentioned above, conformance with regulatory
norms and rules and regulations is indeed one of the drivers behind auditing and historically and
traditionally, has been the main reason why organizations get their financial statements, operational
process, and strategic imperatives audited.

Types of Audits

Among the various types of audits, financial audits are the most popular followed by operational and
strategic audits and in addition to the emerging practice of IT (Information Technology) audits. Moreover,
auditing as a process has now become so routine and compulsory worldwide that organizations spend
quite some time getting their books of accounts and processes audited by both internal and external
auditors.

1. Internal Audits

Internal audits refer to the audits done by employees and stakeholders within the organizations
with a view to evaluate and assess whether the organization is following the internal processes,
norms, rules, and regulations in addition to determining whether it is in compliance with the
regulatory norms.

Indeed, internal audits are sometimes the first checkpoints for organizations to determine whether
their books of accounts, operational processes, and IT infrastructure and security protocols are in
order with both the internal objectives, strategic imperatives, and external regulatory
requirements.

Having said that, it must be noted that the reason why internal audits are not accorded more
importance over external audits is that since they are being performed by employees and
individuals within the organizations, the apparent lack of objectivity and thoroughness apart from
a tendency to “cover things up” means that often, external audits are considered more
trustworthy.

2. External Audits

External audits are done by independent and third party agencies and companies that are
especially tasked with assessing and evaluating an organizations’ compliance with the regulatory
norms.

Further, some organizations also hire external auditors to “hold a mirror to themselves” in the
sense that any deficiencies and irregularities can be found that are otherwise not “visible” to the
senior leadership and management during the course of conducting the everyday operational
business.

Moreover, external audits are also mandatory due to regulatory and compliance reasons as well
as due to the shareholder requirements which mandate that external audits need to be done
annually, quarterly, and half yearly to be presented in the Annual General Meetings, and
meetings of the Board of Directors.

In addition, external audits might also be required in case of contingencies wherein the regulators
who suspect that “something is amiss” in the companies might mandate those companies to be
 audited by independent and third party auditors to ascertain the “true picture” of the finances and
operational details of those companies.

3. Financial Audits

As mentioned earlier, financial audits are the most common form of audits for various reasons
including the fact that businesses exist to make money and return profits and generate wealth for
their shareholders. This means that investors and other stakeholders must know whether the
businesses are being run properly so that their capital is safe and generating the stated returns.

Moreover, financial audits are also the most common forms of audits since any discrepancies in
the books of accounts reflects the mismanagement of the companies in addition to finance
affecting almost all operational and strategic areas of the companies’ and their businesses.

In addition, financial audits are also the first point of evaluation as to whether the companies are
stating the truth and whether they are hiding or covering up some aspect that can be uncovered
and revealed in a forensic audit.

4. Strategic, Operational, and IT Audits

Having said that, there are other types of audits such as operational, strategic, and IT audits that
have become popular in recent years mainly due to the increasing complexity of organizational
processes as well as the IT infrastructure and the fast paced external marketplace which needs
an evaluation of whether the organizations are aligning their internal processes and strategies
with that of the external strategic drivers and imperatives.

In addition, IT audits are being sought to assess and evaluate the readiness of the organizations’
IT infrastructure and systems and IT processes to meet the stated goals and objectives in
addition to being able to withstand IT risks and security breaches. Indeed, with the increase in the
nature, type, and variety of IT risks as well as the increasing complexity of the IT infrastructure, IT
audits have now become as commonplace as financial and operational audits because both
internal and external stakeholders need to know whether the organization’s IT infrastructure is up
to the mark and whether it is capable of meeting the stated goals and objectives.

Some Issues with Auditing and Auditors

In recent years, there have been concerns about audits being used to cover up and hide internal
deficiencies and weaknesses thereby defeating the very purpose for which such audits are needed.
Indeed, even external auditors have been found to be colluding with the organizations in this regard and
hence, regulators worldwide have turned their gaze and tightened the controls and the requirements for
such audits. This has been revealed in the way the United States passed several landmark laws such as
Sarbanes Oxley in the wake of the Enron scandal wherein the auditors, Arthur Anderson, was found to be
“in cahoots” with the management of Enron in cooking the books and covering up the malpractices.

Need for Auditors, Certifiers, and

Consultants to be Ethical and Manage
Conflicts of Interest
How Corporates and Auditors, Certifiers, and Consultants Partner with Each Other

In the corporate world, companies have relationships with a number of external and third party entities
like suppliers, auditors, certifiers, and consultants who either advise them on their strategies, partner with
them in the supply chain, audit their financial statements, and have a network of relationships covering
many areas. If we take the case of auditors, certifiers, and consultants and their relationships with
corporates as the topic for this article, we find that in many cases, the corporates engage with these
entities as part of transacting business for the everyday existence. For instance, company law specifies
that the annual and quarterly financial statements be audited and that the quality processes and the
standards that the company follows as part of its operations be certified by independent agencies. Apart
from this, consultants are usually engaged by the companies to put out guidance statements as well as
advise the financial community on how well or badly the company is doing. In other words, the corporates
have working relationships with all these entities that form part of the independent agencies tasked with
overseeing the affairs of the companies and interacting with them as an interface to the stakeholders and
the investor community.

Real World Examples of Collusion

In this respect, there is a need for auditors, certifiers, and consultants to be ethical in their dealings
with corporates. As was seen in the way the American Energy behemoth Enron collapsed as it was
found to be fudging its accounts and indulging in corrupt practices, the main reason that was found was
that the auditors and consultants, Arthur Anderson, were in glove with the Enron top management in
hoodwinking the regulators and the investor community. Further, the cases of WorldCom, Lehmann
Brothers, and Satyam computers in India were examples of corporates that colluded with their auditors,
certifiers, and consultants in an attempt to indulge in fraud and get away with it. These examples show us
that extreme caution and care have to be exercised by these entities when they deal with the corporates
and they must preserve their integrity and independence at all costs. The point here is that these entities
are professionally and by law tasked with the responsibility of protecting stakeholder interests and hence,
they must not compromise and betray the faith and trust that is placed on them. There are other
examples in this category as well and as most of these cases are still being investigated, it would not be
prudent to name them all. It would suffice to state here that there is a fine balance between providing
professional advice and auditing the statements in a fair and equitable manner and crossing the line to be
conspiring with the corrupt and rotten bad apples in the corporate world.

Changes in the Company Law and Need for Self Regulation

It is not that stakeholders and investors are not aware of these tangled relationships wherein corporates
and the independent entities are often partners in crime. This is the reason that recent changes to the
company laws have made it mandatory for the corporates to change auditors every few years depending
on the logistics and practicalities involved. Further, the company law has been amended to ensure that
consultants and auditors are not from the same company as the Enron case proved that when
consultants and auditors are from the same firm (which was Arthur Anderson in Enron’s case), the
chances for the fraud becoming bigger multiply. Of course, it is understood that the best practices in
corporate governance would entail that these changes and more importantly, oversight from regulators be
the guiding principles for the corporates and the independent entities that provide services to them.
Finally, as has been emphasized by many experts, ethical norms must come from within and any number
of laws cannot substitute for ethical conduct by the corporates and these entities.

Should Asian Firms Adopt American

Corporate Governance Frameworks ?
Need for Global Governance Frameworks

The key aspect to note about how global corporate governance has evolved to the point of uniformity is
the fact that in addition to global capital demanding global rules, there has been a concomitant movement
towards converging corporate governance around the world on the US-led model of governance.

This has been the case with many Asian companies that have not only be prodded and persuaded by
Western investors to institute global governance practices but also because there has been a realization
among these companies that embracing global norms voluntarily would have made them truly global in
nature.

Asian Examples

A case in point is the Indian IT (Information Technology) industry that was at the vanguard of the first and
the second waves of globalization in recent decades. The Indian IT companies were among the first in the
country to embrace global accounting and reporting as well as disclosure standards that have been
inspired by the US model of governance.

Among these companies, Infosys was one of the early adopters, which made the company report its
annual results in the US GAP (General Accounting Principles) format as well as in the Indian version.
That it did so is a testament of not only the regulatory requirements of being listed on NASDAQ Exchange
in the US but also because there was a realization among its senior leadership about the superiority of
the Western model of corporate governance notably the provisions of the SOX (Sarbanes Oxley) and the
ICGN (International Corporate Governance Network) model.

Looking further east, Sony Corporation in Japan was even earlier in 1997 when it adopted western
models of corporate governance, which soon made the Japanese government to institute a
Commercial Code that was modeled along the lines of the requirements of SOX, ICGN, and the OECD
Rules.

These examples prove the case for an international code of corporate governance and its viability in a
market environment where capital, goods, people, and services move freely around the world.

Reasons for Asian Firms to Follow American Governance Models

When there is no uniformity in rules and regulations in such a global marketplace, the situation tends to
resemble the Wild West days of Yore wherein each player and stakeholder behaves according to their
whims and fancies and each speak a language of their own (literally as well as metaphorically) leading to
a virtual “Tower of Babel” where none can understand the others.

Further, the viability of an international code is enhanced when one looks at the recent scandals of poor
working conditions in China, the worker unrest in the Apple manufacturing facilities, the Bangladeshi
garment workers protesting in a similar manner, and the various controversies surrounding large scale
industrial projects in India due to corruption and environmental issues.

Because of these incidents happening in countries that do not subscribe to the same set of corporate
governance standards of the West (from where these companies originate and are funded), the
managements of these companies pleaded helplessness as local laws and regulations were either lax or
poorly implemented and enforced.

This led to a renewed push for uniform corporate governance standards that is international in scope and
uniform in nature. Indeed, as mentioned earlier, there were also calls for a Glocal approach to the
problems wherein global corporations prod and persuade the regional governments to adopt some
uniform rules and at the same time apply them to local conditions so that neither side can claim that the
other does not understand their respective positions on the issue.
Reasons against Asian Firms Following American Governance Models

The discussion so far has made a strong case for an international code of corporate governance and has
stressed its viability. However, despite these points, there still exist many alternative perspectives and
viewpoints that scoff at the feasibility of such a code.

For instance, many experts believe that due to a mixture of historical, cultural, social, political, and
economic reasons, nations, and companies would continue to operate according to local conditions and
resist pressures to conform to an international code.

Further, because of the differing corporate landscapes in each country, which means that patterns of
shareholdings, structure of family owned businesses, and the traditional emphasis on nationalistic
sentiments holding sway and resisting change, some experts believe that we are far from a uniform and
international code of corporate governance. Even more, these experts call into question the viability of
such a code given these reasons.

For instance, it is common for US companies to have a large and diversified shareholder base where
banks, institutional shareholders, governments, and other interests have marginal stakes and the majority
of shareholders follow a pattern where unless there is a significant bloc of them, the combined stakes
would still not be as comparable to that of those in Asia.

It is common for boards in Asia to have institutional, governmental, and bank representation because
these interests control many companies through cross holding and other aspects.

Moreover, this system is somewhat in tune with the nature of the industry and the corporate landscape in
these countries, which need large boards and enough representation to all the key players for political as
well as social reasons.

Therefore, there is little incentive for these companies to abandon a system that has worked so well for
them in favor of a system that is modeled along the boards in the US where diversified shareholding is
the norm.

Conclusion

Perhaps the most important reason why many companies worldwide are reluctant to converge on the US
model, which by implication can lead to an international code that is uniform, is the fact that in recent
years, the skeletons have started tumbling out of the closets of the US companies.

This means that in the same manner in which there is a global pushback against US led efforts to forge a
New World Order which many decry as evidence of the country’s double standards and hypocrisy, many
corporates around the world similarly view such homogenization of corporate governance as neo-
imperialism or a rather weak attempt to achieve hegemony at a time when the chickens are indeed
coming home to roost.

Effective Corporate Governance Has

to be Practiced at all Levels of the
Organization
Some Recent Scandals Involving Corporate Governance

The recent months have seen a spate of scandals involving corporates pertaining to corporate
governance.

From the Indian IT (Information Technology) bellwether, Infosys, to the hottest startup and Unicorn
(startups that are valued at more than a Billion Dollars) and the TATA group to name a few, the corporate
world is agog with governance and ethical and normative codes of conduct being talked about openly.

Indeed, if there is a single thread running across these and other scandals involving corporates, it is that
effective corporate governance has become a bone of contention with the leaders of these organizations
and other stakeholders.

Cultural Mismatch leading to Questionable Corporate Governance

For instance, in the case of Infosys, the founders who relinquished control to a new board and handed
over the reins of the company to an outsider, Vishal Sikka, have been having run-ins with the latter over
issues related to executive compensation and severance pay.

Indeed, many commentators and experts are pointing to the mismatch between the cultural mores of the
founders and the new team since the former have built the company from scratch and imbued Infosys
with a unique work ethic and culture and the latter want the firm to be more aligned with the challenges of
the future.

Thus, in this case, corporate governance issues have cropped up mainly over the business practices and
the vision for the future as exemplified by the gap between the founders and the new board.

The Perils of Fast Paced Growth

On the other hand, the ride-sharing firm, Uber, which is a giant in its own right and which has
revolutionized the way in which transport is organized, finds itself in soup because the board members
who include the founder, Travis Kalanick, have been accused of gross ethical violations as well as
serious charges of sexual harassment and the improper way in which Uber has dealt with violations
regarding ethical and gender based discrimination.

Thus, here is firm that prides itself on being the disruptive force shaking up the world of personal
transportation finding itself in hot water mainly because there is perceived to be a rot at all levels of the
organizational hierarchy related to ethical and normative rules of conduct.

Vision Not Percolating Down the Hierarchy

Further, firms such as Fidelity and the TATA group have similarly been accused of flouting and violating
corporate governance norms mainly because the vision from the top is not shared down the hierarchy
and being behemoths, the executive management can only take things to a certain point after which bad
Apples and stray instances of bad behavior need to be taken both at a systemic and organizational level
as well as at an individual level.

Indeed, the problem with these firms is that being dispersed across the world and being large
organizations, the employees down the hierarchy have a tendency to misinterpret and misjudge the
norms and rules.

This also applies to firms such as Volkswagen wherein in the pursuit of profits and being the first to reach
the market, gross violations in the way in which the automobiles have been made have come to light.
Thus, as can be seen from the examples cited so far, corporate governance cannot be left to the top tier
alone, and at the same time, the top tier too is not exempt from being unethical and flouting normative
rules of conduct.

Indeed, if there is a lesson to be learnt from all these disparate and different organizations, it is that
corporate governance is something that has to be incubated at the top, imbued at all levels of the
hierarchy, and infused into the corporate DNA or in other words, ensuring that there is an organizational
wide culture of ethical and normative conduct.

Everyone on the Same Page Is What Is Needed

It is clear that the executive management has to come up with a vision and mission policy and then,
ensure that it percolates down the hierarchy wherein all employees at all levels are “on the same page”
as far as mutual agreements and codes of conduct are concerned.

At the same time, the executive management too has their task cut out as they need to “walk the talk” and
ensure that their vision and mission are not meaningless statements and instead, carry weight when they
start “leading by example”.

Indeed, both Infosys and the TATA group have had some exemplary individuals as leaders, and often it
was said that the “halo” surrounding them was enough to make the employees accept them as their
leaders.

However, it was also said that sometimes, there was a misalignment between the top and middle layers
since the pursuit of bottom-lines and cutting costs meant that the vision and mission were being paid “lip
service” and not really practiced or followed.

Thus, the other lesson that one can learn is that a pragmatic approach to corporate governance might do
wonders rather than one single star or leader attempting to mold the organization in their own way.
Having said that, it must also be noted that a pragmatic approach to corporate governance does not
mean a “Wink and Nod” attitude towards ethical and normative rules of conduct. Instead, what is needed
is an approach that combines the lofty vision with that of Earthly realities and on the ground exigencies so
that corporate governance is practiced at all levels of the organizational hierarchy.

To conclude, there is not one right approach to corporate governance, and the way in which it is
practiced differs from organization to organization and depends as much on the leaders as it is on
the middle and lower tiers.

Why Corporate Governance Must

Change with the Times
Corporate Governance under Fire

It would be an understatement to say that corporate governance in recent years has been in the news for
all the wrong reasons.

Starting with the much publicized spat between the members of the TATA group which is a venerable
institution with more than a hundred years of history, to the very bitter feud between the founder members
and the present management of Infosys, including the shenanigans of the Harvey Weinstein case,
corporate governance has become a bad word and earned itself a dubious name in light of these cases.
These cases pertain serious allegations of conflict of interest, sexual harassment, and the plain family
rivalry have either been covered up or have led to much washing of dirty linen in public. Indeed, these
examples serve a bad precedent and set a wrong example for the emerging generation of employees.

Poor Corporate Governance sets wrong precedents and bad role models

They might draw the wrong conclusion that anything goes in organizations, and all that is needed is to
ensure that media savvy figures and an army of PR or Public Relations experts are all that is required to
whitewash wrongdoing apart from having the right contacts in the right places that would be parallel to the
“wink and nod” culture that permeates contemporary organizations.

This is certainly not the way to go as venerable and reputed institutions as well as startups and Unicorns
with much potential can be driven to collapse due to the actions of the top management.

Worse, when the top tier of organizations themselves behaves this way, what is to prevent rank and file
employees from taking matters into their own hands and creating a culture of unethical and immoral
behavior?

Moreover, what is to prevent the entire organization from collapsing under the weight of its contradictions
as well as due to the actions of the employees at all levels which can lead to serious problems down the
line.

Is Business as Usual Sustainable?

In addition, what is the message that is being sent as in the case of the Uber board where the founder
and other members were alleged to have engaged in what can be mildly called gender discrimination?
Indeed, the fact that for a long time, Harvey Weinstein’s actions were covered up by the lawyers speaks
volumes about the nature of corporate governance at the moment where anything is permitted as long as
“the show goes on” which means that as long as the music plays, everything is business as usual.

However, it is certainly not the case that the attitude of business as usual in the face of wrongdoing is
sustainable over the longer term. As books such as “Emotional Intelligence” state, longer-term success is
only guaranteed when employees and managers empathize with each other as well as are emotionally
competent to deal with the problems of others and more importantly, can manage their own emotions
very well.

Longer Term Sustainability is the Key

Indeed, this means that only those organizations survive that are built on good corporate governance as
the cases of Enron and WorldCom show us.

In both these cases, the entire top management indulged in extremely unethical behavior wherein
accounts were cooked, and profits overstated as well as debts covered up.

Again, this is what happened to the Indian Software major, Satyam services, that ultimately resulted in the
sale of the organization to Tech Mahindra.

Thus, it is clear that while poor corporate governance can continue over the medium and the shorter
terms, there is no guarantee that it can be continued and sustained over the longer term.

This is the lesson that we can learn from the numerous examples that have been cited here.
Risk Taking and Passivity

Further, while we are not advocating a moralistic approach that leads to paralysis of decision making and
an overall culture that is risk averse, what we are saying is that there must be checks and balances in
place that would ensure that any cases of poor judgment and ethically questionable actions are corrected
before they do lasting damage to the longer-term prospects of the organizations.

In other words, the key point to note here is that there must be institutional safeguards to protect
organizations from straying too far from the path and this means that such checks and balances must be
put in place to prevent the entire organization from being tainted.

Moreover, the fact that Utopian ideals must be followed by realistic actions means that while one cannot
have a purely moral universe, on the other hand, one cannot be without scruples completely as that
would be tending to the other extreme.

Striking a Balance

In short, there needs to be a balance that ensures continuity, and at the same time, a culture of
risk-taking that is so crucial for business success. Thus, the key aspect here is to find the balance
between these competing impulses that would determine the future of the concept of corporate
governance.

Conclusion

Lastly, we are living through times that are very demanding for all as the convergence of several waves of
change and the resistance to such change are all bouncing into each other and hence, it is indeed the
case that corporate governance must change with the times to ensure that it does not fall into the trap of
short-termism and at the same time, does not shy away from being aggressive in the marketplace.

To conclude, as we grapple with change and continuity, risk and passivity, corporate governance must
reflect the contemporary realities and at the same time, not lose sight of its history.

How Generational Differences can

explain the Corporate Governance
Issues in Infosys
The Genesis and the Root Cause of the Problems Faced by Infosys

In recent years, the venerable IT (Information Technology) firm and the bellwether of the Software
industry, Infosys, has been in the news for all the wrong reasons.

Starting with the changes to the Board and the Management to the stepping aside of the founders,
including the allegations about poor corporate governance, and the culmination of the saga wherein
Infosys has agreed to “bury the past” and move forward, the going has been rough and turbulent for all
stakeholders.

Indeed, the travails of Infosys in recent years represent the kind of problems that happen in organizations
when there are competing visions over how organizations must be run and how corporate governance
issues must be handled.
The fact that Infosys is now looking to the future albeit with a slightly tattered reputation means that other
firms in similar situations can learn a lot from it regarding the way in which corporate governance issues
can be handled.

Moreover, the fact that it is now neither confirming nor denying the allegations means that its decision to
leave the problem in limbo can have severe repercussions in the future. As of now, things look settled
though there is no guarantee of recurrence of such problems going forward considering the very different
perceptions over how corporate governance must be handled in Infosys.

Indeed, the Infosys saga presents some lessons for other firms wherein such competing, and conflicting
agendas between the different stakeholders can result in severe stress and trouble for everyone.

Thus, Infosys represents the typical case of a firm that has always prided itself on transparency and
fairness to find itself having to defend its reputation and deny severe allegations of misconduct and
ethics. It is clear that venerable and venerated firms such as Infosys have much to answer about why the
lofty visions underlying its foundations have been sacrificed at the altar of expediency and why ethics and
fairness have been subverted in the quest for growth at all costs.

Generational Divide and Need for a Debate When Firms Transition between
Generations

Having said that, one must also note that it is impossible to run organizations when there is serious
bickering between the Board Members and this is where organizations must make a choice between
choosing to trod the beaten and well-worn path or take a new road less taken.

Indeed, the fact that the former represents stability and comfort whereas the latter represents growth and
risk-taking means that there can also be a generational aspect wherein the younger members of the
management often take high risk and high stakes routes to growth whereas the older members prioritize
less risky and more predictable methods.

Further, mistakes are inevitable when one takes risks and hence, it is also the case that when the
baton is passed to younger and newer leaders, there are bound to be some decisions that can upset
the older and more conservative leaders.

Indeed, if not anything, there is a clear generational difference in the way the wider society has also come
to accept issues related to poor governance, whether by governments or businesses.

For instance, while the Gen X members who are in their forties and fifties now and are increasingly at the
helm of nations and firms prioritize growth and pursue risks to achieve that, there are the Baby Boomers
and other members of the older generations who would like a more predictable course of action.

While we are not saying that Gen X and the Millennials tolerate unethical behavior, it is the case that they
are more tolerant regarding living and coexisting with it whereas the older generations often feel that such
behavior raises a stink that is best avoided.

Also, the fact that the newer generations make compromises as well as prioritize survival even
when some deviations are present can be seen in the way Infosys is seeking to “move on” instead
of jeopardizing the future of hundreds of thousands of employees and stockholders.

Of course, it can be argued that tolerating unethical behavior can lead to the very plausible outcome of
the organization itself ceasing to exist means that one cannot also at the same time, take refuge in the
explanation that it is better to move on instead of addressing the problems at the core of the situation.

Thus, it is clear that there are no easy answers as to how firms such as Infosys transitioning from one
generation to the other can handle crises from differing perceptions and attitudes towards risk-taking,
aggressive growth, and ethical and normative behavior. While the problem seems to have been solved,
for now, we contend that all organizations and not only Infosys have a conversation and a debate over
where they are headed especially now that the Gen X is transitioning to leadership roles across
organizations.

Conclusion

Lastly, without an urgent reexamination of how such transitions can be handled better, such problems are
going to recur in the future for all firms and hence, the view here is that when older generations make way
for newer members, they not only leave behind a direction to the future but also let the younger
generation decide on how they would take the organization forward.

To conclude, continuity, stability, predictability, growth, risk, and attitudes and generational differences
regarding these issues are at the core of the problems being faced by firms such as Infosys and hence, it
is high time the corporate world encourage a debate and a discussion over such issues.

Importance of Whistleblowers in
Contemporary Times and How to Deal
with Them
Whistleblowers and Whistle Blowing in
Contemporary Times
We often hear the terms, whistleblowers, and the practice of whistleblowing mentioned in the media and
in assorted publications. Further, we also hear how whistleblowers have brought to light instances of
wrongdoing and other aspects to do with violations of corporate governance.

For instance, in 2017, the Indian IT (Information Technology) firm, Infosys, was in the news for some
violations that an anonymous whistleblower highlighted to the stock exchanges and other regulatory
authorities.

Indeed, Infosys hogged the headlines in the business press and for all the wrong reasons due to the
anonymous whistleblower repeatedly bringing violations to light. Thus, whistleblowers and whistleblowing
are aspects that all aspiring and working management professionals must be aware of if they want to be
“in the know” about the business world.

Who are Whistleblowers and What do they do?

So, who exactly are whistleblowers? To start with, given the instances of violations and issues related to
corporate governance, it is important for corporates to follow due procedures and norms in the day to day
conduct of business.

Having said that, it is also the case that many corporates often “cover-up” and hide the instances of
wrongdoing due to which there is a need for highlighting such instances.

This is where whistleblowers come into the picture wherein they bring to the notice of the relevant
stakeholder’s issues related to violations of corporate governance and misconduct. Indeed, the
term whistleblowers literally mean people who “blow the whistle” on ethical and normative violations.
This can be done anonymously or openly, and there are examples of whistleblowers that have chosen to
remain in the background as well as examples of whistleblowers that have gone public.

Given the fact that there are always issues related to corporate governance and misconduct in many
organizations, it is indeed the case that whistleblowers are much needed to ensure that due procedures
and norms are followed.

How to Deal with Whistleblowers

That brings to the point about how to deal with whistleblowers. To start with, any complaint or act of
bringing to light violations must be taken seriously by all relevant stakeholders including regulators
and the wider corporate authorities.

Indeed, the complaints of the whistleblowers must be treated with the attention they warrant and the
importance they deserve if such complaints have merit.

In other words, whistleblowers and their complaints must not be derided or brushed under the carpet and
corporates cannot go on pretending that such complaints are frivolous and do not merit the attention that
must be accorded to them. Further, any complaint must be taken seriously and only after ascertaining the
merits and demerits of the most such acts be decided upon.

In other words, it is very important for corporates to treat the complaints of the whistleblowers by doing
due diligence on them. This means that as soon as the whistleblowers bring acts of omission and
commission, such acts must be investigated and thoroughly processed to find out instances of violations
and take possible action on them.

How to Proceed with Complaints?

Having said that, it is also the case that all complaints must be investigated or acted upon in a careful and
thorough manner. Indeed, there are some whistleblowers that create nuisance just for the sake of it and
send in anonymous and public allegations without any basis or logic.

Such acts not only vitiate the atmosphere in the corporates but they also have the effect of diverting and
occupying the time and energy of the decision makers in corporates. Indeed, this is the reason why many
corporates usually do not take the complaints seriously even when such complaints have merit in them.

Thus, the best course of action would be to first ascertain the facts of the case and then, ensure
that the complaints are investigated if there is any merit in them. This is the reason why regulators
and some corporates have dedicated committees and departments to deal with whistleblowers and their
complaints.

Further, given the recent frenzy about sexual harassment and gender discrimination in Corporate
America, it is also the case that whistleblowers and their complaints are taken seriously and at the same
time, they are also not hyped up.

How Many Corporates Deal with Whistleblowers?

In other words, any complaint by the whistleblowers must not be dismissed, and at the same time, they
must also be not hyped up. Indeed, how well corporates deal with whistleblowers is often a reflection of
how well they manage corporate governance and discrimination issues.

For instance, many corporates often deal with gender discrimination by setting up hotlines that
provide the complainants with the much-needed anonymity and confidentiality, and this is the way
to go as far as treating and dealing with whistleblowers is concerned.
Further, there are many corporates that first record the complaints and then ask the whistleblowers to go
public with their allegations. Once this is done, then the whistleblowers are required to submit proof of
their allegations, and after that, the decision makers and the regulators take over.

Conclusion

It is also the case that when the whistleblowers allege wrongdoing at the highest levels, then it creates a
stink that is difficult for everyone to handle.

This is what happened in the case of Infosys where wrongdoing at the highest level was alleged, and the
way in which the whole issue was handled reflects poorly on a venerable organization such as Infosys.

To conclude, it is better for all corporate norms to be followed, and in case, there are any complaints, they
must be treated with the respect they deserve.

Making Corporations Accountable for

their Actions by Voluntary and
Involuntary Means
Why Corporations Must be Made Accountable for Their Actions

Throughout the history of the modern corporations, there have been cases where corporations have
literally and figuratively gotten off with murder and wanton destruction and exploitation of the natural
environment.

Indeed, the 20th century is littered with examples of how rapacious corporations have both extracted
resources from the natural environment without paying heed to laws and regulations as well as have
caused disasters and accidents that resulted in the loss of life and money.

For instance, the Union Carbide Plant Accident in Bhopal in India and the activities of the Coca-Cola
Corporation worldwide come to mind when we discuss how corporations have not only flouted norms but
worse, have actually caused loss of human lives and resources.

While the corporations did not directly cause some of these incidents and accidents, there are some
cases in which cost-cutting and less attention paid to industrial safety and norms of business have
happened.

Thus, it can be said that corporations over the decades have both harmed and destroyed the
environment as well as the human habitations around them and hence, there is a need for the wider
stakeholders including regulators, activists, and civil society to bring the corporations to task and make
them accountable for their actions.

Making Corporations Accountable by Forced Compliance

Having said that, it is not always easy for such stakeholders to make the corporations accountable for
their actions. For instance, in all the examples of industrial accidents and disasters, there are clear cases
of how gross negligence and outright flouting of norms have gone unpunished, and hence, it can be said
that there has to be more action by all stakeholders if they are serious about sustaining and nurturing the
ecosystems and habitats.
Indeed, given the fact that corporations have deep pockets and often hire the best lawyers and lobbyists,
it is a difficult asks for poorly funded activists and sparsely staffed regulators to take the fight and the
battles against the corporations to their logical end and ensure that corporations are made accountable
for their actions.

Moreover, such tasks become impossible when governments pass laws and regulations that are pro-
business and friendly to corporations thereby closing the judicial route to dispute resolution and other
aspects that close the door on any well-meaning efforts to make the corporations accountable for their
actions.

This is the reality that the wider stakeholders have to contend with whenever they confront Big
Businesses.

Voluntary Compliance is the Way to Go

However, it is also not the case that all corporations get away with violations and flouting of norms and
indeed, there are many of them who do follow the norms and laws whereby they ensure that they
voluntarily comply with such norms.

Further, many corporations go the extra mile in ensuring that they not only comply with the norms but also
do more than that by proclaiming a voluntary code of conduct that is more in tune with their consciences
and conscientiousness.

Indeed, such voluntary compliance might be the best bet for everyone since it reduces or eliminates the
need for oversight and repeated monitoring of the activities of the corporations.

Moreover, such voluntary compliance also raises the stakes for other corporations to follow suit so that
they too can catch up with the industry leaders in compliance.

Indeed, it is also the case that the media and the regulators as well as the activists give credit where it is
due and ensure that corporations that follow the norms get their due coverage in the press and are
recognized for their contributions and efforts. All said and done, voluntary compliance is the way to go as
far as making corporations accountable is concerned.

Mass Mobilization and Organized Resistance can be Tried

On the other hand, for those corporations that flout norms and rules, the best way out for the regulators
and the activists would be to ensure that they are brought to task for their actions. While this is easier said
than done, it is also the case that the power of many can help in this regard wherein mass mobilization
and large-scale massing of people that are opposed to such activities can force the corporations to mend
their ways.

Indeed, the power of the media is such that they can make change happen if they set their minds to it.

Further, there has to be pressure on the legislators and the governments as well through well-meaning
efforts to ensure that corporations do not get away with their activities. All said and done; it is the duty of
all stakeholders to keep up their efforts and sustain the momentum both in the regulatory domains as well
as in the public sphere.

Thus, the way to go would be for activists and regulators to up the ante against corporations to ensure
that they are appropriately punished for their actions.
Conclusion

Lastly, there are some worrying trends as far as the United States is concerned, and these relate to the
way in which the Trump Administration is rolling back many of the regulations that govern the
corporations and activities.

Thus, more than ever, there is an urgent need to ensure that people mobilize against such actions and
the point that not doing so would imperil humanity itself needs to be understood.

To conclude, the time is now for action against unethical and unlawful actions of corporations, and in this
respect, business leaders who are conscientious and socially conscious have an important role to play
along with civil society.

Rise of Activist Shareholders and their

Battles with the Boards of Companies
The Emergence and Rise of Activist Shareholders

In recent years, there have been a series of battles between what are known as Activist Shareholders
and the Boards of Companies. These battles which are usually about corporate governance and the
direction and strategies of the companies have often been bitter and acrimonious.

So, who are Activist Shareholders and what do they want? An activist shareholder is one who has
significant stakes in the companies though, not to the extent that they can sit on the board, but very
interested in the running of the companies in which they are shareholders.

Indeed, the emergence of activist shareholders means that boards and companies are under
increasing pressure to clean up their act and improve transparency and accountability in
corporate governance.

What do the Activist Shareholders Do?

Much like the activists who demand answers from the governments in matters of governance, the activist
shareholders, as their name implies have the aim of throwing light on the dark places of corporate
governance and other aspects. Given the fact that corporate governance is usually questioned and
monitored by the board members, the rise of external shareholders who are not part of the boards but
hold enough stake to demand a general meeting of shareholders or for that matter.

Also, they often force voting on the performance and strategies of the companies so that there is more
accountability means that the boards can no longer take for granted the shareholders who are in a
minority since they can muster enough shareholders to their cause.

Some Real-World Examples

While multinationals such as Proctor and Gamble have warded off the threat from activist shareholders in
recent months, firms such as the Indian IT (Information Technology) behemoth, Infosys, have not been so
lucky wherein the founders such as Narayana Murthy, and others ensured that they had their way when
demanding answers from the boards.

It is also the case that sometimes the boards and other shareholders such as Institutional Investors often
prevail over the activist shareholders so that the companies return to a Business as Usual state which is
what happened ultimately with Infosys.
Thus, while activist shareholders do hold and wield significant power, the brute logic of patterns
of shareholding ensures that other shareholders often have the last word since the former do not
have enough votes to ensure that their motions are passed in the general meetings of companies with
their shareholders.

How Activist Shareholders Help Corporate Governance

However, this does not mean that activist shareholders are just a nuisance who can eventually be
brushed aside since they do not have the comfort of numbers.

Indeed, if not anything, activist shareholders have brought a whiff of fresh air into the otherwise staid
world of corporate governance due to their insistence on questioning the practices of companies and their
dogged pursuit of the causes that they hold dear.

Much in the manner of crusaders for justice, the activist shareholders pursue the companies and ensure
that, if not anything, their demands are given a hearing and that they are brought to the notice of the
media and the other shareholders as well as the public at large.

Indeed, the fact that the questions and issues raised by the activist shareholders usually garner the
attention of the media and the public is one reason most companies are afraid or unwilling to drown their
voices.

Given the fact that regulators too might jump into the fray and ensure that whatever issues that the
activist shareholders are raising are addressed, most boards are wary of them, and usually, the safe play
is to call for a general meeting and have voting so that everyone and all the stakeholders are aware of the
issues and the responses to them from the boards.

When Activist Shareholders Succeed

Having said that, it must also be noted that activist shareholders do sometimes succeed especially when
the issues and questions raised by them are serious in nature that the other shareholders too are
uncomfortable with such issues.

Indeed, if not anything, activist shareholders ensure that corporate governance is not opaque or clubby
meaning that outside of the select circle of the board members and other significant shareholders,
everyone else is unaware of the exact details surrounding corporate governance.

This means that activist shareholders and their championing of causes lead to a more democratic
way of corporate governance wherein the rules are followed and any lapses, become hard to cover up
or brush under the carpet.

For instance, some firms in the United States had to address the issues and admit their mistakes when
responding to the problems arising from poor corporate governance.

This has also resulted in the wider public and media coming to know about such problems and acting on
them which is a form of democracy at work. Thus, one can say that activist shareholders have a vital role
to play in ensuring good corporate governance.

Activist Shareholders make Corporate Governance Democratic

Lastly, the emergence and the rise of activist shareholders have coincided with the ever concentrating
power of the boards which anyway does not augur well for the future of corporate governance.

Thus, it is our view that as long as the activist shareholders do not chase frivolous issues or
personal agendas, they can be a force for good in the corporate setups in the same manner in which
public and social activists often force the governments to acknowledge and address the problems rather
than just pretending that they do not exist or diverting attention from them.

Recent Developments Point to a Crisis

in Corporate Governance and the Way
Forward
The Critical Role of Board of Directors in
Corporate Governance
The Board of Directors in all firms and entities is a critical aspect as far as corporate and organizational
governance is concerned. Given the fact that any entity that is registered under the Companies Act or the
other laws pertaining to institutions needs a Board underscores the importance attached to them by the
regulators.

This is especially the case with publicly listed firms where the Boards are answerable to the shareholders
as well. Indeed, all corporates need an established board in accordance with the laws of the land.

These laws can mandate how many Executive Directors need to be on the board wherein Executive
means that they not only have an oversight function but also an operational role. Also, many countries
worldwide have laws mandating the appointment of Non-Executive and Independent Directors.

Apart from this, there are also requirements for Gender Diversity wherein such laws specify the
representation of women in the Board of Directors.

Thus, as can be seen from this, corporates do need to take the composition as well as the advice of the
Boards seriously if they are to follow the norms and procedures of corporate governance.

Crisis in Corporate Governance

In recent years, there has been much debate over the workings of Boards in many reputed and
established companies. In times when overall governance seems to be failing and flailing, the Boards of
many corporates are not far behind as far as dubious oversight and downright unethical conduct are
concerned.

As can be seen from the way in which the Indian IT (Information Technology) Bellwether, Infosys, was
embroiled in an alleged case of breach of corporate governance and ethical conduct, it is clear that even
those corporates, once famed for their high standards of corporate governance, are floundering now.

Further, in the United States, the way in which gross violation and gender discrimination were
being handled by some very well known corporations’ points to how Boards are failing their
shareholders.

More troubling are the cases of conflict of interest that are playing out in the Indian Banking Sector where
Crony Capitalism has taken root in such a systemic manner that the very existence of the Banks is under
question in some cases.
What all these examples point to is there is a crisis of Corporate Governance across the Board (literally
as well as figuratively) and it is high time the regulators and other agencies stepped in to stem the rot
before it is too late.

Reform of Corporate Governance Takes Time and Patience

However, this is easier said than done as Corporate Governance is something that needs patience and
time-consuming efforts that yields result in the longer term. Like how a Tree grows from a sapling, it has
to be nourished and watered as well as guarded against decay and atrophy.

Thus, the seeds of good corporate governance if sowed now and nourished for years would then bear
fruit.

Given the fact that we live in a 24/7 world, where everything happens at breakneck speed and where
instant results are expected, we cannot expect good corporate governance unless we are ready to cut
some slack for the Boards.

Indeed, as the saying goes, as are the people, so are the rulers, and as are the rulers, so are the people,
corporate governance is a two-way street where it has to be both top down and bottom up for it to
succeed.

Having said that, there are also others who believe that ultimately, the Buck Stops with the Boards and
hence, they must take the lead and direct the company in a proactive manner.

How External Shareholders can Aid in Reform of Corporate Governance

Given all these complexities, it is also the case that there is a role for shareholders and especially
Institutional Shareholders in this regard. As they hold significant stakes in corporates, they must also act
and think beyond their immediate need for profit and stability and instead, seize the moment and force the
Boards of Corporates to act.

The rise of the so-called Activist Shareholders is a case in point where shareholders with significant
stakes are ramping up the pressure on corporates to clean up their act. Thus, what we have are different
stakeholders pulling and pushing in multiple directions and each trying to strike a balance between their
interests and the interests of the corporates.

This is where visionary Business Leaders can play a role and it is in ensuring that all stakeholders and
their concerns are heard and their interests protected by a balancing act as well as charismatic leadership
that manages to secure buy-in from them.

Indeed, the need of the hour is for exemplary leadership and corporate governance and with the
Millennials and the Gen Xers approaching leadership positions; they have to take the journey
forward.

The Way Ahead

Lastly, you, the reader who is most likely to belong to either of these two generations should take note of
these trends and prepare accordingly. If you have ambitions about becoming business leaders in the
future, it makes sense if you keep abreast of the latest developments and imbibe an ethical and moral
compass that would stand you in good stead in the years to come.

To conclude, with the dip in corporate governance in recent years, it is time for the newer generations to
take charge and at the same time, be guided by the age-old moral and ethical norms to present a truly
transformative leadership in the future.
How Contemporary Corporate
Philanthropy Works and Its Impact on
Societies
The Why and How of Corporate Philanthropy

Corporate and business leaders often have humanitarian urges and instincts to help society after they
have achieved a certain amount of success in their professional careers and fulfillment in their personal
lives.

Indeed, most corporate and business leaders once they have become legends often have an attitude of
giving back to society following the Maslow’s Theory Stage of Self Actualization.

In other words, they reach a stage in life where their main goal is to actualize their vision and
mission for society and they aspire to help people and societies with a humanitarian outlook.

This can be seen in the way the various business visionaries and legends such as Bill Gates, Warren
Buffet, NR Narayana Murthy, and Azim Premji all have setup foundations and philanthropic initiatives
where they can help the underprivileged and the needy.

Indeed, they are following in the footsteps of the original and pioneering capitalist legends such as
Rockefeller, Ford, and others who similarly setup their foundations to help humanity. What these
foundations and initiatives have in common is that they are funded by the respective individuals or
organizations and often have a mandate to help those in need to the maximum extent without wasting
money and time in lengthy and laborious bureaucratic tangles.

How Corporate Philanthropic Foundations Work

The difference between the governmental initiatives and policies and welfare schemes and the corporate
foundations is that the latter often engage directly with the beneficiaries without having intermediaries and
without leakages in the form of overheads and unnecessary expenses.

On the other hand, these corporate foundations are also known to be staffed by extremely competent
social work graduates and people with direct experience of working in the field thereby maximizing the
impact of the funds spent on noble causes.

Moreover, foundations such as the Bill and Melinda Gates one and the Rockefeller are also known to
work with the governments to ensure that there is better coordination at both the top and the bottom of
the philanthropic value chain.

In addition, since there are experienced social workers who staff these foundations, it is also common for
these foundations to insist on rigorous methodologies for disbursing funds wherein the feasibility and
impact of such disbursements are studied in depth before the decision to fund them are taken.

Some would go as far as to say that some of these corporate foundations work like efficient corporates
themselves both in their approach and their methods at evaluating and deciding on funding.
Some Criticisms of Corporate Philanthropic Foundations

Having said that, in recent years, some activists have begun to question the methods and the approaches
of these foundations in terms of falling into the trap of publicity and attention seeking as well as what is
known as Five Star Activism wherein some of the funders and the foundations often spend their funds
without any real or meaningful impact.

In other words, in the same manner in which most governmental schemes often end up as being Photo
Ops for politicians and celebrities, activists allege that the philanthropic initiatives are likewise aping them.

In addition, their methods are also being questioned in terms of not having any Last Mile Impact on the
people wherein some foundations spend money without the actual beneficiaries benefiting much.

Of course, this is something that the Bill and Melinda Gates foundation has avoided to some extent
wherein they have taken steps to mitigate Last Mile problems in Africa where their vaccinations and other
health initiatives are focused.

Thus, it can be said that some foundations by virtue of having their Ear to the Ground take criticism and
feedback willingly and seek to improve on the same.

Corporate Philanthropy Has to Go Hand in Hand with Governmental Initiatives

The key point to note here is that there is a growing realization that NGOs or Non Governmental
Organizations, The Corporate Philanthropic Foundations, and the various Trusts at some point have to
interface with the government since only then would the schemes and the initiatives have real impact.

On the other hand, there is bound to be corruption and leakage when governments get involved and this
is the reason why the corporate funders and the foundations have to walk a tightrope between
maximizing impact and minimizing wastage and inefficiencies.

This is where personalities such as Bill Gates have a lead over others because by virtue of his status as a
business visionary, he is more likely to engage governmental stakeholders in a better manner and hence,
use that as a leverage to get things done faster and better.

Indeed, this is something that some foundations in India such as the Infosys Foundation and the APPI or
the Azim Premji Philanthropic Initiative have been trying as well wherein they use the goodwill and the
respect that their patrons have in society to drive the various schemes and initiatives in an efficient
manner by engaging governmental and nongovernmental stakeholders in a more effective manner.

Conclusion

Lastly, it needs to be remembered that very few corporate philanthropic foundations reach the scale and
size needed to make meaningful impacts and hence, it would be pertinent to say that they should
complement and supplement the governmental efforts and use their foundations to drive home the
message that the government must first get its act together.

In other words, corporate philanthropy cannot be a substitute for governmental inertia and hence, this is
something that must be understood by all stakeholders.

To conclude, when corporate foundations reach the necessary scale and have a legendary visionary as
their patron, it is more often than not that they make the maximum impact on society.
Corporate Reputation Management in
the Post Truth Era and the Age of Fake
News
What is Fake News and What is Post Truth

We live in times that have been called the Era of Post Truth and the Age of Fake News where facts are
facts only in the sense that they are believed by individuals alone and it does not matter whether such
facts are made up, debunked by others, proved to be lies, and are downright fake.

In other words, what one believes is the truth is the only thing that matters and there is no scope
for objective evaluation and fact checking aspects. one can seen this from the numerous
WhatsApp forwards world over and what more, even the President of the United States, Donald
Trump, regularly tweets what he believes are facts and not what can be objectively verified.

In this context, it is challenging for anyone, whether they are celebrities, corporates, business leaders, or
for that matter, professionals who are generally not in the limelight to protect their reputations since a
single Tweet or Facebook Post or WhatsApp forward which is patently misleading and false and which
goes viral can destroy their hard earned reputation in a matter of minutes and hours.

Why Corporates Must Protect Their Reputations from Fake News

The fact that corporates care about their reputation to the extent that they sometimes employ
professionals communications experts as well as have dedicated Corporate Communications Functions
to interface with the external world means that fake news can affect them to a degree that does not affect
other entities.

Such effects can be seen in the way their products and services often rely on branding strategies for
sales and marketing and their success depends on their brand image and how much their brand equity is
manifest among consumers.

Indeed, if a fake Tweet or Facebook post goes viral and which targets their brands, corporates can be at
the receiving end of such attacks and lose customers and the trust of other stakeholders.

Given the fact that we now live in a 24/7 world where instantaneous communications from anywhere and
everywhere can affect anyone and everyone anytime and all the time means that their brand image can
be shredded in a matter of hours and their reputations tarnished.

Thus, the central challenge of our times as far as corporates and their reputation management aspects
are concerned is to ensure that they have the means to rebut and respond to Fake News and Post Truth
Trends.

How Corporates Can Protect Themselves from Fake News

This can be done by employing dedicated PR or Public Relations firms whose mandate is to constantly
scour the web for both news and fake news about them and react and respond as soon as possible in
cases where the latter is the problem.

Further, their internal corporate communications staff can also develop extensive media contacts so that
they can put out press statements and press releases either debunking the Fake News or rebutting it.
Indeed, this aspect of reacting and responding to Fake News must be a real time and full time job since
with dedicated 24/7 news outlets, there is always the possibility of fake news spreading outside of
working hours as well.

Moreover, corporates also need to look out for misleading news about their CSR (Corporate Social
Responsibility) activities since there is always the possibility that their societal outreach can be twisted
into patently false allegations.

The reason why this is so important is that unlike Fake News about their brands or operations, their CSR
activities involve multiple stakeholders who need to be contacted and made parties to the press releases
and statements debunking the false allegations.

Why Corporates Must Shed Their Complacency about the Effects of Fake News

Having said that, it is also the case that many leading corporates are often complacent about Fake News
not impacting them.

The reason for this belief is that all of them are often well poised and well positioned with the leading
media outlets since they do provide the latter with much needed advertising revenues and hence, they
are unlikely to carry fake news about them.

However, as can be seen in recent months in the United States, even leading corporates such as Nike
which enjoys relatively positive media coverage despite the allegations of CSR violations, has been at the
receiving end of Fake News once it took a stand against the Presidential Administration.

In addition, even if the mainstream media does not disappoint them, corporates need to worry about the
many Millions of ways in which Fake News goes viral in times when anyone with a Smartphone can
quickly make such news go viral.

How Fake News Represents a New Form of Risk

Indeed, the risks from the aspects discussed so far is the topic of a book by the former Secretary of State,
Condoleezza Rice, who lists out the ways in which corporate reputations can be shredded and their brand
image tarnished in a matter of hours if they are not alert to such risks.

Further, she goes on to provide real world examples of how all corporates wherever they are based and
whatever their operations are to be victims of fake news from malicious individuals. Note that we used the
term individuals as for a long time, corporates used to worry about the threat of fake news from their
competitors and it is only now that they are realizing how they can be impacted by anonymous entities.

These entities might not have the financial muscle of competitors of corporates but nonetheless have the
power to damage their reputations. To conclude, it is time corporates took note of the repercussions of
Fake News and do their bit to protect their reputations.

How to End the Culture of Business As

Usual After Instances of Corporate
Scandals
The Worrying Decline of Corporate Governance Standards Worldwide

Of late, there has been a worrying decline in corporate governance standards leading to the exits of many
high profile CEOs (Chief Executive Officers) as well as Directors of Boards from such firms, as well as a
breakdown in the compact between the corporates and their stakeholders.

Whether it is Infosys, TATA Group, IL&FS (Infrastructure Leasing and Financial Services Ltd in India, the
Silicon Valley Firm, Theranos and Uber as well as Facebook and Alphabet (the Parent Holding firm for
Google) in the United States, or the spate of bankruptcies and collapses of the SMEs (Small and Medium
Enterprises) in China, the trust and the reputation of many Blue Chip firms has taken a beating in recent
years.

While the occasional corporate failures and governance scandals are “par for the course” in any capitalist
and free market economy in the world, the worrying aspect in recent times has been the sheer failure of
regulators, stockholders (both institutional and individual) and the broader Media outlets to hold the
perpetrators of corporate malfeasance to account.

An End to the Business as Usual Approaches

Indeed, the present trend seems to be that whenever a business scandal breaks out, some high profile
executives and board members are “allowed to resign” in a “face saving gesture” and then, It is BAU or
Business As Usual which means that the incoming execs and the board members “cover up” and nothing
is said anymore.

As some experts have noted, this is the main reason for concern and indeed, alarm, as once there is no
attempt to hold the guilty to account, there is absolutely no guarantee that the same behavior would not
persist and manifest as a corporate governance scandal a few years down the line.

Indeed, this is what happened to Infosys as the upheaval in 2017 was allowed to die down and the
incumbent CEO, Vishal Sikka, resigned along with some board members and were soon

“rehabilitated elsewhere” whereas the core issues that were responsible for them were never investigated
or were simply buried in a “miasma of legalese” in the form of NDAs or Non Disclosure Agreements and
other such corporate legal niceties that preclude the key actors to go public.

Cosmetic Changes and Window Dressing

Again, this is what happened in the United States as well where Gig Economy firms such as Uber
were found to encourage a culture of “predatory behavior” and where “needles aggression” was
the norm rather than the exception.

Despite multiple accounts and revelations from the employees who were victimized, the end result was a
“cosmetic” change of guard in the execs and the boards and then, it was as if nothing had happened.

Similarly, this is a pattern of behavior that Tesla, which is the firm responsible for the Electric Car
Revolution, is also exhibiting under its flamboyant CEO, Elon Musk, who has now been asked to step
aside in a very ceremonial manner by the SEC or the Securities Exchange Corporation, which is the
market regulator in the United States for his explosive and some would say, controversial Tweets.

Further, even in Europe, the troubles being faced by Volkswagen and Valeant were similarly defused by
what can be called “window dressing” or merely changing the curtains rather than allowing transparency
and the “sunlight of scrutiny” to probe the allegations.
What Individual and Institutional Investors and Regulators Can Do

While some would say that it is good for corporates to own up and then fix the problems without
demoralizing the employees through “Witch Hunts” and other forms of investigation, there is a cause for
concern as nothing is fixed and there is no guarantee that they would find themselves in the same
situation again.

Indeed, there is no worse way to demoralize the workforce other than make them cynical about nothing
been done and cynicism breeds a sense of resignation leading to atrophy of the firm.

This is where the broader shareholder community has a role wherein by virtue of them holding stakes in
the firm, they can indeed hold the firms to account.

Some sort of this is happening in the United States where a new class of “activist investors” has been at
work each time there is a whiff of impropriety among the firms and hence, other countries including India,
should learn from them.

Of course, this is not to say that individual investors should usher in a revolution all by themselves and
the most important role here is that of the regulators and the government in initiating and taking action
against the erring firms.

Further, the other important stakeholders who can affect changes are the Institutional Investors who are
more powerful than the other stakeholder since collectively, their holdings are more than those held by
the assorted categories of investors.

The Hidden Hand of Capitalism and Systemic Changes

Indeed, this line of argument also feeds into the free market narratives where the markets are supposed
to “correct” firms and punish them whenever there is evidence of corporate malfeasance.

However, this hypothesis does nothing to address the systemic issues as well as the question that why
no action was taken when the pressure was building up.

Indeed, the same markets that treat top performers as darlings one day would dump them the next day
when bad news trickles.

While not disputing the power of the “hidden hand” of capitalism in rectifying mistakes, we would instead,
like to point to how the periodic euphoric booms of best market movers should not turn in manic busts
leaving the poor investors poorer.

To conclude, while it is in the nature of economies to be beset by corporate governance scandals, there
must be more efforts to fix the underlying causes rather than “managing the situation” approaches.