Tuesday, June 16, 2009

Improve Board Governance

The Indian corporate sector has matured significantly in the last two decades and we are in the process of building large global conglomerates. It is indeed a proud moment for the Indian corporate sector. However, to sustain the further emergence of strong corporate it is time we start focusing more and more on corporate governance, particularly board governance.

The Board of Director is the supreme policy making body as also the final custodian to protect the interest of all the stakeholders. With the corporate sector gaining strong economic power as also the recent corporate fraud in Satyam Computers, the functioning of the board and corporate governance assume strong significance.

In most of the Indian companies, the Boards still function more to meet the regulatory requirement than any business requirement. The CEO, still largely controls the appointment of the Board. This is dichotomous, since one of the core function of the Board is to review the functioning and performance of the CEO. Many Boards still operate within the broader contours set out by the CEO. The Board agenda as also the Board meetings are largely controlled by the CEOs even in companies where the CEO is not the chairman of the Board. The Boards still depend on the views of the other executive directors and senior officials, who are controlled by the CEO. So in reality the effective functioning of the board to a large extent depends on the desire and willingness of the CEO to make the Board an effective entity.

In addition most of the Board members do not take additional interest in the company beyond the confines of the board meeting. They tend to meet a limited set of senior personnel and do not normally have a keen sense of the ground level realities. The cultural issues of an organization, which has important bearing in any business strategy formulation as also effective implementation, is quite likely to be missed out by the Board.

It is therefore important to build a cadre of strong professional directors, quite in contrast with the largely prevalent practice of ornamental directors, well known names in their respective fields, but not necessarily strong in corporate management. The recent insistence of SEBI for implementation of Clause 49 is a step in the right direction. It will force most of the companies to give a more serious look at the Board. In addition, it is time for institutional shareholders like Mutual funds, FIIs to vie for board representation. They will be able to help in professional sing the Boards. The entry of venture funds and private equity funds will also further help in this direction.

The Board to be more effective should get into the skin of the organization a lot more without any semblance of interference in the day to day working of the company. It should also have the ability to obtain independent professional advice on the various strategies and implementation from outside consultants and professionals. The Board should also be able to obtain independent opinion on bench making of the corporate with other competitors. Bench marking would provide a good platform to judge the performance company and the CEO in a more objective way.

With the corporate CEOs assuming larger than life status in the world of business, the Board has an onerous responsibility in playing the role of an objective evaluator to protect the interests of the stakeholders including the shareholders and the employees.

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