By L. V. V. IYER
The rash of protests across the Atlantic over corporate greed in recent weeks is symptomatic of a deeper malaise, something which cannot be wished away. Unless global economies take serious note of the simmering anger and sense of alienation of the vast numbers, there is a real danger of a social upheaval of global dimensions. Apart from macro economic measures to tackle the deep inequalities between the 1 per cent and the 99 per cent of the population as in America, the failure of the overarching shareholder-centric corporate governance model of the U.S. has been one of the main factors for such inequalities and hence needs to be recalibrated.
Shareholder-centric model: It can be said that an overarching shareholder-centric corporate governance model practised in many countries, including India, results quite often in the redistribution of wealth and not so much in the creation of wealth. For want of a sustainable balancing of the interests of the various stakeholders in a corporate body, such an overarching shareholder-centric corporate governance model results in a skewed redistribution of wealth accompanied by wide inequalities. This phenomenon is taking place in the Indian corporate sector also.
If India has to come out of deep poverty, sustainable wealth creation has to take place. Although, social subsidisation by the government can alleviate poverty in the short-term, the long-term solution to eliminate poverty can only be through sustainable wealth creation.
An inclusive model of corporate governance may be defined as a set of systems, processes and principles, which ensure that a company is governed in the best interests of all stakeholders. The set of systems that help the task of corporate governance would include certain structural and organisational aspects of a company. The set of processes which help corporate governance would embrace how things are done within such structures and organisational systems. Principles would embrace those aspects of corporate behaviour and conduct which society expects of a good corporate citizen. When you talk of the stakeholders they do not mean only shareholders; a company would typically have five stakeholders, namely, employees, customers, suppliers, community and shareholders. To be able to serve the best interests of all stakeholders, a set of systems, processes and principles have to be put in place.
Soft aspects: While various regulations for corporate governance in India and abroad have talked of the various systems and processes, the principles which a corporate governance model should embrace to take care of best interests of all stakeholders have largely remained un-emphasised. These are the soft aspects which in some ways drive wealth creation in a sustainable manner.
Employee innovation and development: The first principle is to enthrone merit in the organisation. A merit-based organisation where leadership qualities are constantly nurtured is the organisation of the future. If Indian corporate sector has to create wealth on a sustained basis, it has to share wealth and power with the most outstanding employees. Venture capitalists in India have not shown the daring and the conviction to support some of the best ideas. This has to happen to make the Indian corporate sector one of the most innovative and creative engines of wealth creation.
Companies have to encourage some of the most outstanding employees to innovate and create even if it were to result in failures. Stock option schemes in India have now lost the attraction. It is time the corporate sector offered attractive stock option schemes to reward the most outstanding and meritorious employees. Succession planning has to be taken seriously even in family-run companies so that leadership positions are filled up only on the basis of merit and performance. In order to create a deep sense of belonging among the employees, it is imperative that the affairs of the company are carried on in a fair and transparent manner.
Creating customer satisfaction: When it comes to customers, companies should give value for money. Customer preferences and needs should be constantly studied to create products and services for customer delight.
Nurturing suppliers: Suppliers are the backbone of the manufacturing sector. The corporate sector has not generally felt the need to nurture quality suppliers. Suppliers are stakeholders who have to be nurtured, to achieve customer delight.
Supporting community: Interests of the immediate community with which companies have interdependence, would have to be taken care of. Most of the societal problems that the corporate sector causes are out of the absence of genuine concern for the members of the immediate community which has been displaced or which has suffered environmental degradation by companies. Unless a humane and holistic approach is adopted in this respect and the genuine concerns of such community are addressed, any model of corporate governance would be a farce and would not create wealth in a sustainable manner. Hence, an inclusive corporate governance model can ill-afford to ignore this aspect.
Once the interests of the above stakeholders are taken care of, with investor-friendly measures the interests of the shareholders would get automatically looked after.
In sum, like Sec. 172 of the Companies Act, 2006, of the U.K., statutory provisions would have to be built into our Company Law so that an inclusive model of corporate governance becomes the statutory duty of the board. Time seems to be propitious to bring in this important change.
( L. V. V. IYER is a Corporate Lawyer. He can be contacted at: firstname.lastname@example.org)