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Has corporate governance really improved?
Mon, 25 Jul Pre-Open

Globally, large organizations are under tremendous pressure to improve their corporate governance standards. The company Board are being asked to take more responsibility for developing strategy and overseeing risk, especially after the financial crisis of 2008. However, the data collected by one of the big four consultants suggests something else. The survey suggests that the board of directors have not increased the time spent in the strategic decision making over the last 3 years. The survey also reveals that many of the directors just review and approve the management's proposed strategies as they do not have enough expertise to provide their views.

As the directors don't spent enough time understanding the business and the company specifics, it becomes difficult to provide any meaningful views. Not only that but, those same directors are members of other boards and therefore it becomes extremely difficult for them to do justice to their each of their specific jobs. As a result, the easiest choice for a director at this level is to approve anything and everything suggested by the management.

At a similar level if we check the board of directors of large Indian companies, we can only see handful of companies having diverse set of directors sitting on the board. The board of directors for Indian companies always seems to be in the pocket of promoters. Barring a few good names, the whole exercise of corporate governance for Indian companies is more of a regulatory compliance rather than an active way of strategic decision making. However, the promoters should understand that better governed companies are better rewarded by markets in the longer run.

According to us, the solutions lie in spending more time with the company and making the directors more accountable for company's action by linking their rewards to the performance of the company. The companies that are serious about corporate governance should choose the board members having mix of skills and intent to contribute in the decision making process. Constructive board discussions and debates should be fostered by challenging the key assumptions behind management's proposals and exploring various biases that board members bring to the table.

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