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Business
Enterprise Governance: a new tool for boards
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A framework that encapsulates both conformance and performance
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Enterprise governance incorporates organisational performance into a business governance framework.
The much vaunted concept of corporate governance (CG) has lost its sheen and given way to enterprise governance (EG) abroad. As Indians, as a rule, are mostly imitators and rarely innovators, it can be expected that in India also EG will soon replace CG.
The concept of CG was included in the equity listing agreement as Clause 49 in February 2000. There were many impellers for this addition, the notable one being the almost plaintiff pleading of the Confederation of Indian Industry that it would not be credible to present one set of accounts to investors abroad and a completely different one to shareholders at home.
Good corporate governance (GCG) has since become the maha vakya of industry and commerce — the term has attracted various interesting definitions. However, this writer would unhesitatingly vote for the succinct definition given by the noted economist, Dr. C. Rangarajan — “CG may be said to include the policies and procedures adopted by a company in achieving its objectives in relation to its shareholders, customers and suppliers, regulatory authorities and the community at large”.
According to the Securities and Exchange Board of India (SEBI), the success or otherwise of GCG depends on the induction of a specified number of independent directors in listed companies. It may be recalled that India Inc has succeeded in postponing the implementation of this stipulation for a considerable period on the not unrealistic plea that it was difficult to locate and induct the stipulated number of independent directors with the expected experience and background. SEBI’s criterion to be considered as an independent director is “a director who, apart from receiving director’s remuneration, does not have any other material pecuniary relationship or transactions with the company, its promoters, its senior management or its subsidiaries, which, in the judgment of the board, may affect the independence of directors”.
There are additional criteria. In this writer’s view no director can be independent in the true sense of the term. He firmly believes in Rousseau’s dictum — “Man is born free but is found in chains everywhere”. Again, it is left to the board of directors whether or not a proposed incumbent will qualify as an independent director. Another negative stipulation is that a person can only be director of a stipulated number of companies. The SEBI Chairman is on record saying, “The board room is centrestage to CG and one needs to tackle issues such as how many boards should one person be on, what his contribution should be or whether he should just ‘grace’ the board.”
This writer had a gut feeling when Clause 49 was first included in the listing agreement that only compulsion would induce companies to induct independent directors. This has been confirmed by the Managing Director of the National Stock Exchange Ravi Narain, who observed recently that “though 98 per cent of the NSE listed companies have complied with the CG requirements, they do so because of the rules and not as a culture.” This writer fails to understand the parameter used to arrive at this conclusion.
One also fails to understand how the SEBI Chairman could recently assert that “GCG norms helped in boosting investor confidence in a corporate”.
It has to be conceded that CG norms have failed to inspire management mostly because of the element of compulsion. One cannot but agree with the far sighted observation made in 1998 by the U.K.’s Turnbull in another context that “it was felt that those companies that viewed internal control as sound business practice were more likely to have embedded it into their normal business processes, and more likely to feel that they had benefited as a result, than those that viewed it primarily as a compliance exercise.
A study by the Institute of Management Accountants of the U.K. observes that no single issue dominates CG failure and it is rather a combination of interrelated issues. Key issues included failure of culture or tone at the top; CEO dominance that often bordered on the celebrity; board of directors, especially weak boards or those that failed to take necessary actions at the right time; and deficient internal controls.
On the other hand, enterprise governance incorporates organisational performance into a business governance framework, especially in terms of decision-making strategy formulation and execution. The report advocates that all perspectives must be in place in order to support high performance.
EG has now become, in the U.K., an area of increasing focus for organisations, as it considers both the conformance and performance aspects and stresses that the two need to be kept in balance. In the words of Graham Ward, President, International Federation of Accountants, the heart of EG is the argument that bad CG can ruin a company, but good CG cannot, on its own, ensure its success.
In conclusion, good CG is a hygienic factor — it can prevent failures, but it does not guarantee success; effective strategy and execution is essential for success, and EG is a framework that encapsulates both.
S. BALAKRISHNAN
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