Opinion

Good conduct leads to good corporate governance

R Anand | Updated on October 15, 2019 Published on October 15, 2019

The value system of every company shows up in the day-to-day conduct of the top management. Corporates that spend enough time and energy in adhering to good conduct emerge clear winners in the long run

A few years back, I happened to meet the CEO of a large company and asked him: “In your daily MIS which is the single item that you track closely?” Without batting an eyelid, he replied: “Emails pending reply by the senior management team including myself!” I almost fell off my chair.

He went on to say that courtesy and conduct are exemplified by replying to all mails within reasonable time. Good conduct automatically results in good governance and bad conduct is the prescription for corporates to go downhill over a period of time. Most corporates ignore the virtues of the behavioural aspect of governance in their quest of seeking rapid growth and chasing profits. This set me on the exciting journey of discovering the difference between corporate governance and corporate conduct.

Governance

Governance is the process whereby elements in society wield power and authority and enact policy and decisions concerning public life, and economic and social development. Extending this concept to corporate governance, it means the manner in which the management prescribes conduct of the organisation. This also means that governance is overarching, and conduct is the way of executing governance.

By design, good corporate governance means abiding by the laws and regulations in letter and spirit and ensuring that all statutory obligations are discharged on time. Of late, it also encompasses the manner in which board and committee meetings are conducted and the decisions minuted.

Corporates that are obsessed with full compliance will leave no stone unturned in adhering to the letter and spirit of laws and regulations. They probably constitute 10 per cent of the corporate population. The other extreme is some corporates taking a considered view that penalties are cheaper than adhering to regulations, more so considering the overall cost of compliance. For them the stigma of non-compliance is a non-issue. These constitute, say, 10 per cent of corporate population.

The balance 80 per cent form the safety net group where compliance is respected and followed in letter but may not be fully in spirit. They would take multiple legal opinions for an adventurous route and back themselves that it will finally succeed in the Supreme Court. There is an overall feeling that there are too many regulations and the costs of compliance and litigation are disproportionately high in India compared to global standards.

Transparency

Good corporates believe in a full and fair disclosure of their approach to all stakeholders. Chairman’s speech, board report, management discussion analysis and notes on accounts to financial statements are areas where one can judge the quality of full and fair disclosure of corporates.

Disclosure of all accounting policies, managerial remuneration and related-party transactions in a fair and transparent manner is a requirement in today’s corporate regulations. What is probably a grey area is the disclosure in a proper manner of actual liabilities as against contingent liabilities. This item in some sense is a lever in determining the right quantum of profits to be reported to shareholders. The list of items in contingent liabilities is a minefield today and, in many cases, the actual liabilities are camouflaged as contingent liabilities.

Also, disclosure of other non-financial matters such as conservation of energy, technological absorption, etc., are reported more like a statistical information rather than in a detailed cogent manner. This is a case of compliance in form rather than substance. There is also a tendency to park unwanted lengthy information in notes to accounts — for example, depreciation policy runs into pages but vital information like R&D, related-party transactions, and amount unspent on corporate social responsibility is explained in just three lines.

Corporates fall victim to the danger of selective transparency. There is always this danger of selective transparency versus full transparency. It is again a function of the personality of the CEO or MD. If he speaks straight from the heart all the board agenda papers would also reflect the same. If by nature he is not that type, then the papers will also showcase it.

Evolved organisations ensure that full and fair disclosure is made in respect of each item in the agenda papers and a sign-off is obtained from the CEO or MD that all material information is provided to the board. Such a practice leads to good governance and also enhances the quality of decisions. Likewise, the minutes of committee and board meetings should ensure full transparency of all relevant decisions, including issues that are discussed. While there are no standard formats for minutes of meetings, corporates should evolve their own formats taking into consideration the complexity of the agenda items and the nature of decisions taken.

Conduct

The value system of every company is imbibed in the day-to-day conduct of the top management. Corporate conduct consists of two parts: conduct vis-à-vis internal management (workforce); and conduct vis-à-vis external stakeholders — other shareholders, vendors, regulators, customers, etc.

Corporates that spend enough time and energy in adhering to good conduct emerge clear winners in the race to the final destination of excellence. Corporate conduct also flows from the personal attributes of the leader. If he swipes the access card first coming into office, then others will follow and come on time. Though we live in an age of flexible timings, good corporate conduct at the top always sets the example of early entry into office and late exit from office.

There are corporates focussed on ensuring that every small creditor is paid immediately. This is an example of exemplary corporate conduct. Courtesy and warmth displayed to all parties visiting the office — notably vendors, customers, service providers and prospective employees — leave a lasting impression in the minds of people. Organisations that are focussed only on good behaviour with regulators and indifferent behaviour with other stakeholders are not endearing themselves to good conduct or good governance.

Exit interviews, particularly of senior management personnel who leave the organisation, are valuable pointers where conduct of superiors come into focus. More often than not, corporates ignore the importance of feedback coming in via these exit interviews. Dilution in conduct becomes visible when corporates transition to the next generation, more so when the executives taking over the reins do not attach importance to good conduct. The danger signals of decay start at this stage.

Another example of good corporate conduct is where companies ensure that no element of personal expenses is charged to the company’s account. There are enough checks and balances in the areas of propriety in the Companies Act and Income Tax Act to ensure that personal expenses are not charged to revenue.

However, shades of grey are visible where some of the expenses have both official and personal elements. The feeling in corporate sector is that “all expenses are official, unless proved otherwise”. Corporates with good conduct ensure that every item of expense is official and there are no shades of personal element involved. Corrective measures are possible, provided corporates believe that they need corrections. It is here an enlightened board can step in and engineer the required corrective measures.

Model code of conduct

Tata Motors: The TATA code of conduct embraces the spirit of i-PURE, namely Integrity, Pioneering, Unity, Responsibility and Excellence. The box relating to integrity epitomises ideal corporate conduct. It says, “We will be fair, honest, transparent and ethical in our conduct; everything we do must stand the test of public scrutiny.”

Google: The Google’s code of conduct has two distinct compartments: The first relates to the external world which can be termed as PRAISE-U: Privacy, Responsiveness, take Action, Integrity, Security, freedom of Expression and Usefulness.

The integrity of Google is built on trust, which states: “Our reputation as a company that our users can trust is our most valuable asset, and it is up to all of us to make sure that we continually earn that trust. All of our communications and other interactions with our users should increase their trust in us.”

The second compartment deals with internal management which includes, among other things, harassment and safe workplace. The common link in both the codes of conduct is customers. Every organisation has now moved towards a customer-centric approach.

Conclusion

With so many first-generation and start-up companies coming up it is vital to instil in them the importance of good governance and good conduct. Training sessions on corporate governance should have modules on good conduct which alone will ensure sustained and profitable growth for corporates.

The best CSR (corporate social responsibility) that corporates can undertake is first ensuring that they conduct themselves with decency and courtesy while dealing with stakeholders and the community at large. After all, charity begins at home. Any documented code of conduct is good on paper, but the true test is in its application.

It does not require one to be an Albert Einstien to understand that the spate of corporate frauds and corporate scandals is the result of bad corporate conduct resulting in poor corporate governance. Swachh corporates should be an integral part of the Swachh Bharath Mission.

The writer is a chartered accountant

Published on October 15, 2019
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