Getting a measure of corporate governance

Robust, quantifiable governance norms will enhance the process itself while raising market valuation and credit prospects

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By UD Choubey

Evaluation and accreditation of achievement of corporate governance in an enterprise is a critical issue today. But there is no well-recognised accreditation model to evaluate this in different enterprises.

Corporate governance has become a movement across the globe. There is fresh thinking at Board level to arrive at new institutional mechanism, codes and standards, strategy formulation and its execution. Any accreditation and evaluation of corporate governance would require objective oriented criteria to finally decide the rating of the enterprise.

Corporate governance rests on the four fundamental cornerstones of fairness, transparency, accountability and responsibility. Ethics are essential as they extends beyond corporate law. No singular model of corporate governance is being adopted all over the world. Different countries have different models of corporate governance and rightly so as cultures, traditions, legal structures and ownership structures vary from country to country. Yet the four core principles have been influential in setting of the Code of Governance across the globe. The accreditation model will also have some difference from country to country even though overall evaluation may have similar criteria.

There has been a piecemeal approach towards performance evaluation so far. The memorandum of understanding (MoU) has been a good model but it is limited to target orientation; companies opt more for achieving targets but that sometimes leaves the vision and strategy behind. MoU is nothing but some sort of agreement between government and the enterprise to achieve or exceed the target set forth for financial and non-financial performance such as CSR, environment protection, digitalisation, employees and gender issues. It is also providing a way for performance related pay for employees. MoU may not be taken as complete evaluation model. A foolproof accreditation model is the only way to judge the overall governance. A robust mechanism would be required for rating the enterprise in terms of their performance of corporate governance.

Why accreditation?

Companies often are not able to benchmark themselves on their corporate governance standards, and as a result they are unable to improvise on their existing practices. This is where Peter Drucker’s wrote “…if you can’t measure it, you can’t improve it”. Hence, it is important that an accreditation tool is developed so that corporate governance status of a company can be measured comprehensively and improved upon. Accreditation would also provide a standardised and systematic way to analyse corporate governance across companies operating in different sectors. This has become an essential aspect to improve against benchmarks.

This would also help regulators to monitor the corporate governance levels of companies and pave the way for further reforms as it would assist in identifying strengths and weaknesses in corporate governance practices. At the same time it would incentivise the company to compete and improve their brand.

An objective measurement of observance of corporate governance norms would help in developing benchmarks, thereby promoting better adherence to corporate governance norms. This, being a continuous process, would also help organisations to analyse their progress over time and help them to identify with the best observed corporate governance practices across the country/globe. A high accreditation rating on corporate governance would add positively to the overall credit rating of the organisation, thereby making the company more investor friendly and also in form of better credit worthiness. It has been observed that companies with higher credit ratings or quality standards ratings have a better brand image.

Similarly, a higher accreditation for corporate governance will improve the market valuation of the company. Accreditation incentivises companies in adopting improved corporate governance practices. The tools for accreditation would give stakeholders a uniform tool for measurement across portfolios, schemes and competitive scripts. Also, accreditation would help the lenders to make informed lending decisions.

Framing accreditation model

The accreditation framework should be based on the four pillars of corporate governance i.e. Fairness, Transparency, Accountability and Responsibility. There shall be multiple micro parameters such as how much customers are delighted, which would be measured by their satisfaction with respect to quality of the product, service quality/ response time and after sale service. Similarly, there would be multiple parameters to each micro aspect of satisfied suppliers, willing investors, trusted employees, happy creditors, assured government, rich society, unified community and protected environment.

Therefore, it would be best if the accreditation process adopts the OECD principles of corporate governance — ensuring rights of shareholders and key ownership functions and equitable treatment of shareholders, including minority shareholders. This should also include disclosure, transparency and responsibilities of the Board.

In addition to the above principles, accreditation should be progressive and not aim at achieving minimum standards. The process should be comprehensive in coverage and aim at covering all stakeholders. Also, it should be objective, measurable and universal so as to be applied across all sectors and industries along with ability to identify gaps in corporate governance practices. Lastly, it should be extensive and attain highest quality of assurance processes so as to ensure independence and reliability in assessment.

It is essential that the questions should cover all aspects of corporate governance. Once the parameters are developed, the next step would be to develop the marking system i.e. how much weight should each question carry so as to arrive at the final scoring.

Last but not the least, the system of accreditation should be made mandatory to all companies, else the entire reason for developing the tool would be lost. Initially, it should be made mandatory for all listed companies and companies proposing to list their scripts. Further, it could be a vital parameter in obtaining corporate rating for the company and its scripts.

The above model is only suggestive as developing a system for accreditation would require substantial efforts.

The writer is Director General, SCOPE and member of the Uday Kotak Committee on corporate governance. The views are personal.

(First Published in Business Line on July 28, 2017)

Picture: t5oilandgas.com

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