Corporate Governance has always been a burning issue when it comes to the stability of the capital markets. There has been sufficient evidence in the past that weak corporate governance reporting procedures and poor stakeholder management have severely jolted investors’ confidence in the capital markets. It also hampers the image of the Indian companies across the globe.
Corporate governance has often been complicated by many people. As we step aboard on the importance of corporate governance, let me give you a small example to untangle this complex term.
When my kid turned 4, I was on the lookout for the best school in my vicinity. There were two schools, within the radius of 2 kms from my place. Based on my research, the first school was helmed by a principal who was disciplined, transparent and always willing to meet parents and solve their queries.
Coming to the second option, the management of another school was based out of Australia and the principal often came across as extremely arrogant and uncommunicative. The only fascinating things were the swanky interiors and the pedigree of the teachers.
The options were in front of me. I had to select one school and I went with the first one.
As simple as that, the first school was an exemplary demonstration of good corporate governance policy.
Corporate Governance And What It Means To Investors?
If you look at the Investopedia definition, corporate governance essentially involves balancing the interests of a company's stakeholders which includes shareholders, management, customers, suppliers, financiers, government and the community.
Let’s take a few examples over here:
PwC resigned as the auditor of Vakrangee on account of flagging concerns around its books of accounts.
Punjab National Bank hit by Rs 14,000 crores on account of the illicit use of LoU’s by Nirav Modi.
Consider these companies: Gitanjali Gems, PC Jewellers where serious questions on management’s integrity were raised by the investors.
All these point out to feeble corporate governance policies helmed by scandalous management.
Robust corporate governance policies remind the management and directors of the company that they work for the shareholders and not just themselves.
What Should Indian Investors Look At?
When we talk about the corporate governance and their impact on investors, are we talking only about those biggies which constitute around 1-2 percent of the shareholders? No, we are talking about the white collar and blue collar professionals who are amongst us. They are the professors, factory workers, managers, business heads – all who have their stakes in the companies.
Before investing in any company, there are three principles which give a glimpse of sound corporate governances policies and processes. They are - credibility, transparency and engagement.
Credibility: Take the example of Tata Group. What’s the first thing that comes to our mind?
These values have been displayed by the management from time to time. With the appointment of N Chandrasekaran, the companies have designed more stringent reporting procedures to protect the interests of their stakeholders.
Transparency: Transparency often accompanies accountability. Lack of transparency is a red flag for investors. Timely and public disclosure of the company’s business, executive directors remuneration, financial and operating data, both historical and forward-looking are the signs of good corporate governance policies. The access to these statements along with audited financial reports, special notes in an annual report, auditors report, non-disclosure statements and other disclosures is particularly important when it comes to investing in the companies.
Engagement: Investors need their voice to be heard. To address the investors’ concerns, many companies such as Motherson Sumi Systems Limited are taking increased measures to increase shareholder involvement. It is not worth investing in a company which is led by shoddy management, reluctant to meet their shareholders and restricted to only their corner office.
A good corporate governance policy is often followed by high stakeholder satisfaction index which is beyond numbers and textbooks. It is not a one-time task. Good corporate governance policies are demonstrated by the approach with which management deals with the creditors, customers, government and the community on a regular basis.The writer is the founder of Research & Ranking. The views expressed by the author are personal and not of moneycontrol.com or its management.