Meaningful Minutes

What is corporate governance

Corporate governance is defined as a complete system of practices, rules and processes that govern the way a company is directed. It encompasses each and every aspect of management including internal controls and corporate disclosure.

Why it matters

In the current day, corporate governance is essential for each and every company. This is because any decision taken by a company affects numerous stakeholders, including you—the investor. The aim of corporate governance is to balance the interests of all these stakeholders. Without a proper framework, senior management in the organisation can have the power to work towards their own vested interests. For example, they could easily decide to pay themselves higher salaries even without any merit.

Basic rules of corporate governance

In response to the large scale collapse of companies such as Satyam, the government and stock exchanges are coming up with new stringent rules. The aim of these rules is to put a stop to such malpractices in the future.

Due to this reason, companies are supposed to take issues such as financial disclosure and transparency very seriously. Organisations are supposed to disclose all relevant information in a timely manner. This ensures that all stakeholders have complete access to information.

Implementation of rules

The Board of Directors is the pivotal link between managers and shareholders. It is absolutely necessary for the board to effectively implement good governance and constraint on senior managers. For this reason, the board should consist of independent individuals who have no commercial strings attached with the company.

The other aspects are financial disclosure and ethical behaviour. These are two important pillars of corporate governance. It is not in the long-term benefit of companies to hide information. This leads to situations where money must be paid to silence people (that’s why it is called hush money).

Common corporate governance problems

When companies do not follow the corporate governance rules, it can create problems for the company. For example, Infosys is now facing allegations of having paid hush money to former CFO Rajiv Bansal.

The founder Narayana Murthy questioned whether the company wanted to hide something by paying such a large severance package. In addition, it has reportedly been revealed that the minutes of the severance package meeting were not recorded. This raises further doubts regarding this matter.

How to avoid corporate governance problems

Studies indicate that investors are starting to take corporate governance more seriously. But how can a company avoid corporate governance problems?

To start off, participation in and tolerance of illegal activities is a strict No-no. In the race to earn the highest profits, companies often ignore the right way of doing business. One scandal is enough to sink the company.

In addition, companies must not try to publish spurious financial results. Tech company Satyam tried to do this and met with a disastrous result. It is also important to cooperate with auditors and disclose all the necessary information in the right manner.

Good and bad corporate governance

If you were to study the internal working of different companies, you will find that almost each and every company adheres to corporate governance. However, there is a difference between bad and good corporate governance. Bad corporate governance practices result in situations where CEOs and CFOs benefit from gigantic pay packets without the approval of shareholders. Poorly structured boards ensure that shareholders cannot remove certain members. All this affects the company negatively. Bad corporate governance casts a shadow on the integrity of a company’s image.

On the other hand, a company that follows good corporate governance practices will strive to create a transparent set of rules. This will ensure that all stakeholders have aligned incentives. In addition, the power resides in the hands of shareholders.