Good corporate governance is more than compliance
Corporate governance, to me, is about maximizing shareholder value legally, ethically and on a sustainable basis. All of this while ensuring fairness to stakeholders - the company's customers, employees, investors and vendor-partners, the government, and the community at large. Corporate governance is the reflection of a company's culture and policies, its attitude toward stakeholders, and its commitment to values.
Good corporate governance serves several important objectives. It enhances the performance of corporations, by creating an environment that motivates managers to maximize returns on investment, enhance operational efficiency and ensure long-term productivity growth. Consequently, such corporations attract the best talent on a global basis. It also ensures the conformance of corporations with the interests of investors and society, by creating fairness, transparency and accountability in business activities among employees, management and the board
Longevity is the best index of success of a corporation, and good governance is a necessary condition for longevity and growth. Corporate growth requires investment. Good corporate governance increases public confidence in a corporation, and lowers the cost of capital for investment. According to a McKinsey study, over 60% of investors cite good governance practices in a corporation as a key factor in their investment decisions.
Today, capital flow is not constrained by national boundaries - it flows where it finds a hospitable climate. There is tremendous competition among nations - developed and developing - to attract global corporations and entrepreneurs to create high-quality, high-income jobs. These corporations and entrepreneurs require massive inflows of capital, but only an effective governance model can attract investment. It is in this context that I express my views on corporate governance.
Evolution of corporate governance practices
History is replete with examples of governance fraud - from the Great Depression of the early 1930s, widely perceived to have been triggered by corporate mismanagement and indifference toward workers, to the Enron debacle in 2001 followed by the collapse of WorldCom, Qwest and Tyco in 2002. Such major scandals and rising investor dissatisfaction with governance practices have led to demands to 'raise the baseline' of mandatory disclosure and compliance by corporations.
U.S Securities and Exchange Commission Chairman Arthur Levitt once remarked,"No longer is corporate governance an arcane topic for high-minded, legal debate. Today there is new, widespread concern regarding the standards of corporate behavior." These concerns have triggered a shift away from "soft law" such as comply-or-explain requirements. The emphasis is now on "hard law" - mandatory compliance requirements, with governance practices strictly supervised by regulators.
In the US, the Sarbanes-Oxley Act (SOX) and the revised New York Stock Exchange and NASDAQ listing rules have created stringent standards for financial disclosure, committee and board nominations, and audit policies. Many countries have followed the US in implementing stricter compliance. The European Commission expects its new corporate governance directive, scheduled to take effect by 2009, to enhance transparency laws and empower shareholders. In Asia, revised corporate governance regulations in several countries, including India, Hong Kong and Singapore, mandate much stricter compliance for corporations.
Need to go beyond regulations
Corporate governance programs must set an agenda for long-term returns by going beyond regulatory obligations. While SOX and other initiatives have created a framework for better governance, I believe that such rules-based regulations can succeed only if we create a mindset for decency, honesty and respectability among corporate leaders. It is true that, by and large, most corporate leaders are committed to these values. However, we must create disincentives for the small minority that has not imbibed them.
The continued shift towards 'hard law' and greater regulation in corporate governance can result in what the Wall Street Journal calls "governance at gunpoint." It is not possible to regulate every aspect of corporate behavior without adversely impacting operational flexibility of corporations, discouraging reckless risk-taking, and daunting the progress of honest corporations.
Also, government regulations are, after all, ethics that are externally mandated. It is instructive to remember the words of former US President Bill Clinton: "We must consider how excessive business regulation and 'box-ticking' will ensure business performance." An unethical company can bypass even the most draconian regulation. It can incorporate every governance practice in form, and still possess none of them in substance. Hence, government intervention in cases of non-compliance must act as a stimulant for progressive companies to go beyond the benchmark.
Good corporate governance cannot be legislated through a 'checklist' of rules and regulations. Compliance shouldn't be the primary driver of good governance. We must address the basic cause of corporate malfeasance - the lack of a strong environment for good governance within the corporation. I believe that any system is as good as the people who use it. Hence, the focus has to move toward creating an environment where respectability matters. What we need is self-assessment in the areas of ethics and performance at every level.
Corporations need to be sensitive to various aspects to ensure that their business operates within the realms of sound corporate governance. These include better board preparedness and balance of power, moderation in CEO salaries, bonuses and perks, increased accountability to shareholders, and creating a mindset that values decency and honesty. Business leaders must walk the talk to ensure penetration of these values into society.
Where do regulatory compliance and corporate governance converge? Organizations are looking at their governance structure and processes to ensure compliance within the existing framework. I believe that in a world 'flattened' by globalization and technology, it is not sufficient to focus on internal mechanisms. Many aspects of the existing 'external' system must change.
Adopt a uniform global accounting standard
For one, the world should adopt a uniform global accounting standard. In today's environment of globalization, it is best if all nations agree to adopt the International Accounting Standards (IAS). This will make it easy to compare the performance of corporations of a particular industry across countries. In the absence of such a uniform accounting standard, Infosys has demonstrated its investor-friendliness by becoming the first company on NASDAQ to publish its balance sheet and income statement according to the Generally Accepted Accounting Principles (GAAP) of the eight countries where we have investors - India, US, Canada, UK, France, Germany, Japan and Australia.
Ensure 'responsible governance'
Corporations must ensure that incentives for senior management and board members are effectively aligned with responsible governance and long-term corporate health. The pay of principal officers must be directly linked with overall performance covering all functions of the corporation - operational health and efficiency, client and employee satisfaction, and shareholder value.
Create a strong climate of opinion in favor of respectability
Corporate leaders have to create a climate of opinion that values respectability in addition to wealth. I believe in seeking respect, since this forces me to do the right thing by every stakeholder. Such behavior ensures better employee retention, better sales and profits, better market capitalization and better compensation for me and others.
Business leaders must openly condemn their peers who do not follow a proper code of conduct, however influential they are. The economist Robin Matthews has noted that once we create a mindset where "the role of honesty in our social contracts becomes significant," the very threat of 'losing honor' within society becomes a preventive measure for greed.
Institute global awards for good corporate behavior
We must institute international awards for good corporate behavior, and promote a global corporate governance ranking system for Fortune 500 corporations. We have to create mechanisms to evaluate the contribution of independent directors across corporations, and institute awards for the best of them on a global basis.
Nurture Corporate Social Responsibility
Next, corporate social responsibility (CSR) must become a natural extension of corporate governance. Adopting higher CSR standards cannot be a regulation - or an industry-driven initiative. We have an obligation to contribute to human development and the sustainable growth of the world; all our activities must reflect our respect and concern for our people, community and environment.
Finally, as corporations trading on stock exchanges across the world, we must never lose sight of the fact that we are responsible to an extended society. Of course, abiding by the laws of all the nations we operate in and applying the basic principles of governance across various legal, economic and political systems are neither easy nor a matter of choice. But we must choose to go beyond them. We must commit to demonstrate good corporate citizenship, adopt high disclosure and reporting standards, and proactively participate in shaping better governance practices and standards.
Good governance has the power to transform into competitive advantage and enhanced stakeholder values. Responsible behavior is the catalyst that can effect this transformation. Let us imbibe it and make it part of our DNA.