Intensive lobbying by the India Inc. has resulted in the Companies (Amendment) Bill 2003 being sent back to the drafting table. Leaving aside the quality of drafting of the Bill to critics, we believe that the step of shelving the bill is a step backwards in implementation of Corporate Governance measures. The provisions in the bill that were opposed by industry chambers and the corporate included a) changes in the composition of the board of directors, b) number of subsidiaries a company can float, c) routing of investments through subsidiaries, and d) the mode of approval of transfer of shares etc.

Similar concerns are reflected when chief executives’ meeting in the US has recorded that ‘new rules aimed at preventing corporate scandals like those that sank Enron Corporation and WorldCom may be going too far, discouraging top managers from taking any risks at all? Are we giving more importance to form over content? As some industry associations in India have pointed out, are we throwing the baby out with the bath water? We invite opinions and rejoinders on the issue.

Editor

(Any views and opinions expressed by authors, writers in this e-journal are of their own.
Corporate Governance Journal is not responsible for the facts, figures, views, and statistics appear in this journal.)

Rebuilding Public Trust and Revitalizing Companies: Reforming Corporate
Governance and Creating Dynamic Boards

By
Jenny Varcoe-Cocks
Director, Priam Pty Ltd
Email: smivc@ozemail.com.au
[Extract of paper submitted by the author at the Henley Management College 6th International conference on Corporate Governance and Direction.

The future is not the past again – and to quote John F. Kennedy – “Change is the law of life, - those who look only to the past or present are certain to miss the future.”

Boards are knowledge workers, and to engender public confidence, they must demonstrate, wisdom, integrity, accountability, but – also a sound understanding of the core business, the nature of risk and reward, and, likewise the strategic direction, of where they are heading, through sustained growth.

Boards are accountable for setting the “Tone at the Top”. Good Corporate Governance practices, (this over-used word, perhaps leadership governance is more appropriate), are not only measured by compliance and conformance to regulations, but also, by qualitative attributes. Thus Reputation is more valuable than dollar reward in the longer term.

As Charles Handy recently quoted in an HBR Article (HBR – December 2002) “What is a Business For” –

“Trust, (too) is fragile. Like a piece of china, once cracked, it is never quite the same. And people’s trust in business, and those who lead it, is today cracking”.

In recent times governance reforms have been taking place worldwide in the major countries, and although through differing regulatory bodies, and statutes, they all have a common focus on Board accountability and effectiveness. Herewith below are given the key aspects that help Boards to perform better.

Selecting and Structuring Effective Boards:

• Formal, and transparent Selection Processes
• Diversity
• Board Induction and Learning

Building a Value-Framework

The Board Charter, or Leadership Policies:

• Defining the Core Business:
• Articulating the Values
• Matters reserved for the Board
• Code of Conduct

Board Dynamics

• The attributes of Intellectual Honesty
• Cohesive Board
• The “inclusive” approach

Selecting and Structuring Effective Boards:

In the context of creating and building dynamic Boards, there is increasingly some common agreement from major developed countries, (e.g. current research in the USA, Higgs & Tyson Report, U.K., ASX Corporate Governance Principles, Australia, and King Report – South Africa) which concur with the following principles:

• Independence: Boards should comprise at least some, and most expound “a majority” of non-executive independent Directors. In Australia, an Independent Director is defined as: independent of management, and free of any business relationship that could materially interfere with, (or perceived to materially interfere with), the exercise of their unfettered and independent judgment.
• All Directors should bring independent judgment in discussing matters, and ideally, should confer regularly at scheduled sessions without management.
• The Chair should ideally be an independent non-executive
• The role of CEO and Chair should be split, and if not an independent lead Director appointed, thus allowing for clear division of responsibility.
• Likewise a CEO should not move on to take the role of Chair.

The above concepts of objectivity and independent stewardship are conducive to building trust from investors, however the true value of the Board is reflected in the knowledge and commitment of Directors.

Board Resources:

The main role of the Board is: to approve the strategic direction of the company, closely monitor performance, and the risk profile, appoint, monitor and guide the CEO.

These functions require high level skills and experience gained in a corporate environment, to enable informed judgments to be made both collectively, and individually.

Based on statistics, Board members in developed countries typically comprise, wise “old” white Anglo Saxon males within the aged between 55 to 62 years. Women still on average represent less than 10% of Board members.

There has been much criticism of the performance of Boards over the last decades, not so much from the lack of talent, but rather the lack of commitment. Poor performances have led to a lack of trust in Boards, for not competently fulfilling their role.

Today the world is moving faster, within a global, technological, business environment. There is no future – the future is now! Companies are required to be flexible, able to make decisions, and move goods quickly, and show initiative and strong customer awareness. A “rubber-stamping” Board is unlikely to add value. A company will also earn respect from the way it treats its employees, all stakeholders, and the environment.

Thus there is true value in ensuring the Board is relevant to the company and the industry and environment in which it operates. More careful and perhaps formal Board selection processes will objectively identify the appropriate knowledge and skills, and also size best suited to the Board. Typically, Board appointments have been given to prominent CEO’s on retirement, and usually by associations, rather than formal processes such as executive search. In most countries, less than 40% of Board appointments are made through the search process.

Skills such as marketing, IT, H.R. are useful Board skills for many industry sectors. The recent Tyson report recommends, more diversity on Boards could lead to more dynamic interaction and original input, (given that mutual trust exists amongst Board members).

Smaller size Boards of less than eight members are increasingly favored. This puts considerable time constraints on Board members, and likewise increases the obligations and commitment.

The importance of formal written induction processes are increasingly emphasized to ensure new Board members have a sound understanding of the governance and operations of the organization. Learning should be a continual process for a Board, especially for those operating in a global competitive environment. Board members must be abreast of current industry and operational issues, and compliance matters, if they are to make informed decisions in driving the business forward.

The above might appear quite elementary, but if the Board comprises relevant talent and experience, with commitment, and a learning approach, and a willingness to review and measure performance, - then it is a sound governance platform. And, good base elements for the Alchemic Board to create competitive advantage.

Building a Value Framework

A key theme of this paper is that organizational value is related to the values and reputation of an organization.

Directors, who set “the tone at the top” are responsible for establishing governance principles, which influence the culture and behavior of an organization. Determining, and communicating a code of governance principles which include a framework of values and behavior is an important instrument in enhancing the reputation of an organization.

The appropriate medium to communicate to stakeholders is through written corporate governance policies in the form of a Charter or Code.

In Australia, the recent ASX Principles of Corporate Governance (March 2003) recommends a listed company disclose its corporate governance practices. If it does not do so, it must explain “if not-why not?” In the UK listed companies must explain their compliance with the Combined Code, and approach to governance practices.
The concept of a Board Charter is proving to be a topic of strong interest by Boards in Australia.

A Board Charter is an instrument that can articulate not only the governance matters reserved for the Board, but also a system of values and principles of business conduct for the organization.

Typically a Board Charter will refer to:

• The system of governance – in regard to strategic guidance, effective monitoring of management, and Board accountability to the entity and members.
• The Role of the Board, including Director’s rights and obligations,
• Role and power of Chair, and individual Directors
• Delegation of authority to CEO
• Board responsibilities, and powers of the Board
• Board operations, e.g. agendas and meetings, committee structures
• Board Selection, Induction and Training
• Annual Meetings
• Reporting, Disclosure and Transparency

And also to include the

• Values which the Board adheres to, and
• A recommended code of conduct, describing behavior to all stakeholders
• Responsibilities for environmental, community, and social investments.

To be effective and relevant the Charter should not be longer than 3-4 pages, and known to all employees and communicated to key stakeholders. This Charter, however, could be meaningless unless the company is accountable for measuring performance and reporting against it.

In summary, the Board should define values to support the vision and mission, and strategic direction, and relate to the principals of ethical business practices.

An “Alchemic Board” would ensure such value expectations are exceeded in ways which will enhance the organization’s values, and hence its own market value. Likewise if value enhances the reputation, it will provide opportunity to leverage to new opportunities and growth strategies.

Board Dynamics

Generally it would be agreed that good corporate governance in the form of compliance to legislated regulations does not necessarily relate to sound reputation and “intellectual honesty”.

Mervyn King recently described commercial success as being the sum of commercial wisdom plus profit plus intellectual honesty.

King further describes intellectual honesty as having the following attributes:

• Ensuring the credibility of decision making processes by Directors by asking the question – “Do I have all the facts? – Is there any conflict in the matter?”
• The ability to apply the duty of care, skill and diligence.
• The ability to make rational business decisions, and ensuring they are made in the best interest of the organization.
• Ensuring that communication to stakeholders is transparent
• That the organization is acting in a socially responsible manner, and that the
• Directors believe in good faith that they are acting as a good steward of the company’s assets
  

Cohesive Approach

Effective Boards must have mutual trust and respect for one another. In Jeffrey Sonnenfeld’s paper “What Makes Great Boards Great” (HBR September 2002), he claimed, “What distinguishes exemplary Boards is that they are robust effective social systems.”

This forms the platform for individuals to have the courage and enthusiasm to speak their minds independently, and not fall into a group think situation. Board members should be confident they are all “rowing” in the same strategic direction, with the same values.

The “value add” of individual contributions is recognized in the capability to make constructive criticism, and suggestions, to challenge management, and effectively contribute to scenario planning.

A Board is a strategic asset, and the value is also measured in the quality and rigor of debate, and commitment of Board members to honestly and diligently provides individual and collective accountability.

In this context effective and dynamic Boards will demonstrate leadership through effective governance practices. They will not prescribe to rubber-stamping, but participate in creating the vision, mission and values, and will display trust, based on integrity and competence, and, importantly, empower management to achieve the agreed targets with appropriate resources and processes.

Management theories regarding successful leadership now align with a more softer, inclusive approach of working through others, to achieve goals. Tomorrow’s Company describes inclusive leadership as appropriate for future organizations. And refer to the following criteria:

• Inspirational and visionary qualities of transformation leadership
• Willingness to learn and facilitate learning of others
• The concept of stewardship – of acting as custodian of the organization’s reputation and resources
• The perception of leadership as a service.

Inclusiveness according to Tomorrows’ Company includes not only financial returns, but also a shared vision and values, and building mutual trust and relationships with all stakeholders. And, acceptance of the need to earn a “license to Operate” in the context of a society increasingly concerned with corporate social responsibility.

Thus, in perspective it is not increased compliance and regulations, which will improve governance, but developing a value framework into governance principles and empowerment to a corporate culture which has an inclusive approach and earns a respected and enduring reputation.

The quality of values inherent in the governance and management of an organization will also have an effect on the value of the organization.

(reprinted with permission of the author).

Corporate governance enhances business competitiveness by integrating corporate social responsibility into every aspect of corporate management. Since corporate reputation serves as a useful and powerful asset / resource for companies to develop its competencies, and outperform competitors, companies that accommodate the needs of a wider range of stakeholders are more likely to yield good reputation and credibility than those which do not. This paper attempts to investigate the validity of the statement that corporate governance is a competitive necessity for companies in a local context. The objective of this study is to test the perceived connection between competitive credibility and corporate governance from two different perspectives: company’s and consumers’, using consumer survey and company questionnaire. Another objective is to identify the aspects of corporate governance that consumers and companies perceive as significant. The analysis were done not only of the outcomes of the consumer survey and company questionnaire, but a comparative analysis was also carried out to determine the link between consumer and company perception concerning corporate governance. The study concludes that corporate governance is not yet a necessity for successful competition in Indian IT sector but if local and regional companies wish to enter the global market, they will need to employ good corporate governance strategies. Finally, recommendations were made based on the outcome of this study.

Key Words: Corporate Governance, Competitive credibility, Information Technology

• Integrating corporate governance into business strategy is a necessity and will be so in future.
• Both consumers and corporations within the Information Technology sector believe that corporate governance is a “must” in gaining a competitive credibility.
• Growing features of modern corporate governance such as social/ethical responsibility are valued equally by both consumers and companies.

• Reduction of Potential Liabilities.
• Improved Resource Management.
• Increased Market Reach: this can be achieved through differentiation of products/ services from competitors using good corporate governance practices as a tool.
• Effective stakeholder Relations Management: Corporate governance is a community issue. It is the responsibility of everyone to conduct himself or herself in an ethical and responsible manner (Fan, 2002)
• Increased Profitability: as a direct result of the aforementioned benefits good corporate governance will result in direct bottom line improvements.

• IT software and services exports
• IT-enabled services
• The domestic IT market
• Telecom infrastructure
• Venture capital
• IT software and services exports

• Custom Application development and maintenance
• Applications outsourcing
• IT enabled services
• R&D services

• Knowledge of Corporate Governance
• Competition within the Information Technology Sector
• Consumer Demands
• Knowledge of Corporate Social Responsibility

• 3 out of 5 companies demonstrated a detailed understanding of the concept. They mentioned transparency, responsibility, disclosure and interest of stakeholders. 2 companies defined CG as a system by which the corporation is governed. All the five companies are currently employing corporate governance practices.
• It is interesting to note that none of the five companies ranked profitability as the top benefit gained by employing Corporate Governance. 2 companies ranked FFI at top. 2 companies ranked improved stakeholder relations at top and 1 company ranked enhanced image and brand at top.
• All the five companies agreed that they have a responsibility to disclose the Corporate Information to all stakeholders.
• In terms of the key incentives for the company to disclose their corporate information - 3 companies ranked international best practices at top. One company ranked Legal Requirements and one company ranked shareholders demands at top
• All the five companies agree that globalization has affected the competition within the IT industry in India.
• On the question of important features which make their companies successful competitor. Two companies ranked Brand Name at top. Two ranked Good Customer Services and one ranked Price at top. Social and ethical responsibility of company was ranked only after price, brand name, customer service and quality.
• All the five companies considered Corporate Governance to be a must for successful competition in the market.
• On the question of the factors which company think that customers take into account when making their purchasing decisions- two companies ranked price at top. Two ranked Quality at top and one ranked Brand Name at top. The social issues were ranked last or second last by all of the five companies.
• All the five companies agree that customers would be interested in seeing their corporate information.
• Out of five only two companies have Quality Management System in place. This is surprising because some of these companies who don’t have such QMS claimed that quality is their strength in the market.
• All the five companies believe that they have a duty of care towards the community. They ranked Health and safety, Human rights, Labour issues, and Charity work at top.
• These five companies believe that shareholders, customers and employees and local community are the stakeholders of their companies.
• Out of the five companies three companies provide very wide choice for their employees in terms of the training that include Financial, Legal Compliance training, Customer Service, and Product Knowledge trainings.

• Both group consumers and companies valued price, quality and band name as the top factors for purchasing decisions. But companies failed to perceive Social issues as an important factor that is valued at the top by a significant portion of the consumers (55.7% consumers ranked social issues in top three). This fact suggests that companies need to improve their understanding of the consumer’s expectations to gain the competitive advantages. This fact is felt in the marketing companies also: “ Marketers may not feel motivated to change until more Asians demand greenness with their purchasing power. But those who wish to capture some of the North American, European or Austrian markets had better prepared to make their products meet the standards now being demanded by consumers there.” (Asian Advertising & Marketing, 1991). Lam. J.C.K., Salahuddin, S. and Tsoi, J. C.S. in their study using Hong Kong retail industry, obtained similar results.
• All the five companies agree that consumers want to see their corporate information but they did not rank customers expectation as a key incentive to disclose. In consumer Survey 77.8% of the respondents feel that the companies have the responsibility to make their internal corporate information available to the public.
• Only 20% of the consumers have an understanding of the Corporate Governance but all five companies have quite a good understanding of the concept. All five companies agreed that Corporate Governance is an important factor of successful competition. 88.5% of the respondents agreed that corporate governance was a must in gaining a competitive advantage. This fact clearly depicts the importance of corporate governance in the minds of the consumers and companies.

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