Recent Developments Point to a Crisis in Corporate Governance and the Way Forward

The Critical Role of Board of Directors in Corporate Governance

The Board of Directors in all firms and entities is a critical aspect as far as corporate and organizational governance is concerned. Given the fact that any entity that is registered under the Companies Act or the other laws pertaining to institutions needs a Board underscores the importance attached to them by the regulators.

This is especially the case with publicly listed firms where the Boards are answerable to the shareholders as well. Indeed, all corporates need an established board in accordance with the laws of the land.

These laws can mandate how many Executive Directors need to be on the board wherein Executive means that they not only have an oversight function but also an operational role. Also, many countries worldwide have laws mandating the appointment of Non-Executive and Independent Directors.

Apart from this, there are also requirements for Gender Diversity wherein such laws specify the representation of women in the Board of Directors.

Thus, as can be seen from this, corporates do need to take the composition as well as the advice of the Boards seriously if they are to follow the norms and procedures of corporate governance.

Crisis in Corporate Governance

In recent years, there has been much debate over the workings of Boards in many reputed and established companies. In times when overall governance seems to be failing and flailing, the Boards of many corporates are not far behind as far as dubious oversight and downright unethical conduct are concerned.

As can be seen from the way in which the Indian IT (Information Technology) Bellwether, Infosys, was embroiled in an alleged case of breach of corporate governance and ethical conduct, it is clear that even those corporates, once famed for their high standards of corporate governance, are floundering now.

Further, in the United States, the way in which gross violation and gender discrimination were being handled by some very well known corporations’ points to how Boards are failing their shareholders.

More troubling are the cases of conflict of interest that are playing out in the Indian Banking Sector where Crony Capitalism has taken root in such a systemic manner that the very existence of the Banks is under question in some cases.

What all these examples point to is there is a crisis of Corporate Governance across the Board (literally as well as figuratively) and it is high time the regulators and other agencies stepped in to stem the rot before it is too late.

Reform of Corporate Governance Takes Time and Patience

However, this is easier said than done as Corporate Governance is something that needs patience and time-consuming efforts that yields result in the longer term. Like how a Tree grows from a sapling, it has to be nourished and watered as well as guarded against decay and atrophy.

Thus, the seeds of good corporate governance if sowed now and nourished for years would then bear fruit.

Given the fact that we live in a 24/7 world, where everything happens at breakneck speed and where instant results are expected, we cannot expect good corporate governance unless we are ready to cut some slack for the Boards.

Indeed, as the saying goes, as are the people, so are the rulers, and as are the rulers, so are the people, corporate governance is a two-way street where it has to be both top down and bottom up for it to succeed.

Having said that, there are also others who believe that ultimately, the Buck Stops with the Boards and hence, they must take the lead and direct the company in a proactive manner.

How External Shareholders can Aid in Reform of Corporate Governance

Given all these complexities, it is also the case that there is a role for shareholders and especially Institutional Shareholders in this regard. As they hold significant stakes in corporates, they must also act and think beyond their immediate need for profit and stability and instead, seize the moment and force the Boards of Corporates to act.

The rise of the so-called Activist Shareholders is a case in point where shareholders with significant stakes are ramping up the pressure on corporates to clean up their act. Thus, what we have are different stakeholders pulling and pushing in multiple directions and each trying to strike a balance between their interests and the interests of the corporates.

This is where visionary Business Leaders can play a role and it is in ensuring that all stakeholders and their concerns are heard and their interests protected by a balancing act as well as charismatic leadership that manages to secure buy-in from them.

Indeed, the need of the hour is for exemplary leadership and corporate governance and with the Millennials and the Gen Xers approaching leadership positions; they have to take the journey forward.

The Way Ahead

Lastly, you, the reader who is most likely to belong to either of these two generations should take note of these trends and prepare accordingly. If you have ambitions about becoming business leaders in the future, it makes sense if you keep abreast of the latest developments and imbibe an ethical and moral compass that would stand you in good stead in the years to come.

To conclude, with the dip in corporate governance in recent years, it is time for the newer generations to take charge and at the same time, be guided by the age-old moral and ethical norms to present a truly transformative leadership in the future.

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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to and the content page url.