Corporate Governance in India – Compliance vs Conscious

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Corporate Governance in India: The contemporary issue of Corporate Governance (CG) has been widely debated in India for a while. There have been numerous academic and professional workshops, seminars and conferences covering the topic in all dimensions. This author is, though, of the considerate view that despite the existence of an elaborate legal framework to ensure good corporate governance, the conduct of business in an ethical, legal, transparent and socially responsive manner has largely remained far from reality in India.

Unfortunately, the concept has been often viewed as a statutory compliance issue rather than an ethical one. The mandatory Auditor’s Report on CG ensures compliance in letter but not truly and essentially in spirit. The spirit is very closely related to the conscious and it demonstrates the real intention to achieve the desired level of CG for the welfare of various stakeholders. So, effectively, CG is more a conscious rather than compliance issue. A good conscious will surely ensure good governance but a good compliance without a good conscious may not guarantee good governance in real terms. An entrepreneur with a good conscious will conduct the business affairs in an ethical and transparent manner even when, there is no statutory compulsion to do so while an entrepreneur with not so good conscious will do so, only if there is a statutory compulsion and only to that extent. This author is not in any way attempting to undermine the importance of regulation to achieve good corporate governance but it is felt that the mere existence of regulation can not foster real corporate governance unless there is a genuine intent reflected through the corporate value system.

Good conscious will ensure that corporate goal is directed towards serving the society to earn profits rather than earning profits and then serving the society. The protection and enhancement of the community interests then becomes the main focus area. It will also, no doubt, translate into a more attractive bottom line but with a more socially conscious approach. Many would perhaps disagree with this proposition particularly in highly corrupt business surroundings, where ethical conduct of business may not achieve the financial aspirations of the investing community. But, then you need to choose between “the economics devoid of ethics “or “economics based on ethics”.

It is also necessary to link the good corporate governance with the bottom line and market valuations to achieve the primary corporate goal of maximization of shareholders’ wealth. For that purpose, the index of corporate governance needs to be factored into fundamental analysis in the process of security evaluation. To be more specific, the growth factor in the dividend discount model (D1/k-g) needs to incorporate the element of good corporate governance. Similarly, the P/E multiplier needs to be adjusted and enhanced for good corporate governance. These adjustments in the valuation models would result in higher market capitalisation as a justified and well deserved reward for good corporate governance system. And the top runner in market capitalisation will also be the top runner in corporate governance.

The corporate conscious is reflected through and depends upon the conscious of the persons entrusted with the responsibility to manage and carry on the corporate affairs to achieve its goals. Not only the Board members but staff working at all the levels of organizational hierarchy need to possess and display good conscious for effective CG, though in real life, it may be a distant possibility. The author is also of the strong view that the very important group of independent directors with no financial stake in the company can play a very important and decisive role to ensure good governance, if not only they are individuals with strong technical capabilities but are also individuals of clean conscious. The selection criteria for independent directors and other key officers must include this so important factor because it can make a vital difference in corporate working and its organizational culture.

The compliance largely implies forced regulation while conscious is more concerned with self regulation. The corporate governance achieved through good conscious ensures that it naturally flows in the system, processes and plans and thereby aims at sustainable growth. It is an inbuilt mechanism which lasts over a long period of time. It is generally noticed that while regulation tends to attain a minimum or reasonable standard of performance, the process of self regulation on the other hand can guarantee exceptional levels of performance. Therefore, self-regulation is always a preferred mode to produce desired results consistently and over the long run. The author is optimistic and looks forward to the increasing levels of corporate governance in India in very near future, based on both conscience and compliance.

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