Ethics and Corporate Governance

Date
April - 2021
Author/s
-
Title
Ethics and Corporate Governance
Details:

                                                                                                                                                                                                                For Members only. For Private Circulation only.

Bombay Chartered Accountants’ Society

Harnessing Talent and Providing Quality Service

Thought Mailer                                                                       Vol. 11 1 No. 09 1 April 2021

CA Shilpa Sehgal

Ethics and Corporate Governance

This is a very timely piece touching upon an area that has impacted each one of us in recent times. The impact on us might have been severe or limited but none of us have been untouched by the recent spate of Corporate Governance issues that have tumbled out like skeletons from a cupboard and rolled into our lives. Whether that is the IL&FS failure, whistle blowing episode at INFOSYS, DHFL, HDIL, Yes Bank, or Punjab & Maharashtra Cooperative Bank scam or any of the other corporate that failed in its business due to Corporate Governance issues, they have all brought us closer to introspection of what entails good Corporate Governance. This write up is a humble attempt to awaken the ethical and moral compass for us as individuals and the corporate entities we work for or interact with.

Ethics can be said to be a code of principles that form the character and conduct of a person and define what is right or wrong. Ethical behaviour is said to be one that conforms to this code. It leads people to behave in a way that benefits society at large, rather than their own narrow self-interest. Religious scriptures such as The Gita, The Koran and The Bible talk about morality and ethics and pro-hibit murder, theft, adultery, and promote kindness to others, respect for all life and respect for elders. According to these teachings, individual ethics is a means to an end, its purpose expands to help the members of society to rid themselves of self-centeredness, cruelty, greed, and other vices, and thus to create an environment helpful to the pursuit of the higher good, which transcends society. Ethics are the philosophical and morally decent standards that every individual attempts to stand by, while governance processes are the means by which a corporation attempts to remain as ethical as possible while still making a profit.

Corporates are the building blocks of modern economic life. Their phenomenal contribution in channelizing the resources of the earth into wealth has shaped the present physical and social world. Corporate Governance refers to the way in which the corporate houses conduct themselves while pursuing the goal of profit making. Corporate Governance is based on the concept of consciousness, transparency and openness. It refers to combination of laws, rules, regulation, procedures and voluntary practices to enable the companies to maximize the benefits to all the stakeholders. It is concerned with the issue of morality that arises in any situation where employers and employees come together for the specific purpose of profit generation through production of commodities or rendering of services. Corporate Governance is a system by which an organization is managed, or in other words how an organization is directed and controlled. It is about

a. Commitment to values
b. Ethical business conduct and
C. Exercise of powers in a responsible way i.e. while exercising powers always keep the interest of other side (the stakeholders)

On a broader prospective, Corporate Governance focuses on relationship between a company and a broad range of stakeholders. A company can achieve excellence only by being trustworthy to stakeholders, satisfying its customers, enhancing productivity through people, and fostering value driven organization. It is all about balancing individual and societal goals, as well as, economic and social goals. It is important to note that excellence in business cannot be achieved without having Governance over long term.

Board of Directors is a group of people who jointly manage the affairs of a company. The Board is the primary channel through which the Governance practices and culture percolates to the entire organization. Sir Adrian Cadbury pioneer of the Corporate Governance thought process has explained that, “the Board of Directors are responsible for the Governance of their companies, while the shareholders’ role in Governance is to appoint the directors and auditors, and to satisfy themselves that an appropriate Governance structure is in place.” The Board is responsible to ensure that the management is acting in the best interest of the shareholders. The Board of Directors is essentially at the heart of the concept of Corporate Governance.

The Board of Directors is entrusted with the important duty of steering the direction of any Company. Just like the head of a family is responsible that the family conducts itself in an appropriate manner the Board is responsible for the company. The day to day conduct of any family is the sum total of the behaviour of each and every family member and in that sense each member is equally important for their roles and responsibilities. Similarly, in a company each and every employee has the responsibility to do his work ethically and to the best of his/her ability. In an ideal world this perfect synchronization of each individual member ensures that the family or the company is on the right track and can benefit its members in a just and moral way.

Currently we all are witnessing many Governance failures and a downward trend in the public sentiment and negative mindset due to many corporate failures and scams. Boards, entrusted with task of following the ethical and Governance standards have failed the shareholders of many organizations by not fulfilling their duties. Every board is obliged to comply with the legal and moral code of conduct. Failure to do that continuously over a period of time has resulted in the corporate breakdowns and loss of public faith. This has led to concern and doubt towards the institution of Board of Directors which is the most important set of people in any company.

Hindu philosophy states that every person’s thoughts translate into actions, which create karma and become part of his fate or destiny. Every person should fulfil their duties ethically. One can enjoy life in this world, but without coming in the way of similar enjoyment by others and without cheating and deceit. Indian philosophy has been advocating ethics and moral conduct from age old times and many other societies have learned from our philosophy, why then are we in the thick of such a crisis?

In the time of crisis, the head of the family provides guidance and steers the members towards the right direction. Similarly, it is the duty of the Board of Directors to consider the significance of their role and give direction to their companies. There is also a need for - improvement in the regulations for the Board of Directors, training and knowledge expansion as well as internal assessment procedures pertaining to each and every Board. Some of the measures in the pipeline that our government is considering are increasing the independence of the board, online exams and voting process for appointment of the board, scrutiny of reasons for resignation of the auditors and directors and a detailed examination of related party transactions.

Starting from the regulatory bodies right up to the very last employee that sells a product and concludes any commercial transaction the ethical approach should be the guiding force. Only then can true Corporate Governance be achieved. The setting of Governance codes is the first step; however, implementation and regular monitoring are the key factors. Similarly, the corporates should keep Governance at the heart of all their interactions. Only when each individual conducts ethical lifestyle will any company and nation be able to rid itself from malpractices and frauds. Only then will the society truly progress and that Renaissance is the need of the hour. As we all know individual ethics and Corporate Governance are inextricably linked. Whether we are making mundane everyday decisions or monumental strategic shifts in our personal lives or for the corporate, we have to remember the few pointers above and act in the best interest of the greater good. Indian culture propagates happiness for all human beings and we take pride in our culture and learnings. The only thing we as a nation need is to look within and all the answers are right there. Our scriptures have blessed us with ancient wisdom that is unmatched and have been a part of us in some way or the other. It is the need of the hour to collectively respect that very ancient wisdom and look to our traditional learnings and set the direction right.

 

 

About: CA Shilpa Sehgal,

CA Shipa Sehgal is a Partner at Equanimity Investments. She is a rank-holder Chartered Accountant and is pursuing her PhD in Corporate Governance from Mumbai University.

She is passionate about investing her time and energy in early stage businesses. She writes on the topics of Investing and Corporate Governance on various forums.

She can be contacted at : shilpa@equanimity.vc

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