Good Governance & Corporate Governance in 2023

What is Governance?              

Governance has been defined to refer to structures and processes that are designed to ensure accountability, transparency, responsiveness, rule of law, stability, equity and inclusiveness, empowerment, and broad-based participation. Governance also represents the norms, values, and rules of the game through which public affairs are managed in a manner that is transparent, participatory, inclusive, and responsive. Governance, therefore, can be subtle and may not be easily observable. International agencies such as the UNDP, the World Bank, the OECD Development Assistance Committee (DAC), and others define governance as the exercise of authority or power in order to manage a country’s economic, political, and administrative affairs.

Principles of Good Governance

For the World Bank, good governance consists of the following components: capacity and efficiency in public sector management, accountability, a legal framework for development, and information and transparency.

In the development literature, the term ‘good governance’ is frequently used. In particular, the donors promote the notion of ‘good governance’ as a necessary pre-condition for creating an enabling environment for poverty reduction and sustainable human development. The good governance agenda stems from the donor’s concern with the effectiveness of the development efforts. Good governance is expected to be participatory, transparent, accountable, effective, and equitable, and to promote the rule of law.

Under the Sustainable Development Goals, Goal 16 can be considered to be directly linked to good governance as it is dedicated to improvement in governance, inclusion, participation, rights, and security. According to former United Nations Secretary-General Kofi Annan, “Good governance is ensuring respect for human rights and the rule of law; strengthening democracy; and promoting transparency and capacity in public administration.”

[8 Principles of Good Governance: United Nations]

Corporate Governance: International Models and Legal Environment

Corporate governance is a subset of omnibus governance. Thus, not all principles of good governance apply in equal measure to corporate governance.

Corporate governance refers to the system of rules, principles, practices, and processes by which a company is governed. Since it also provides a framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

There has been renewed interest in the corporate governance practices of modern corporations, particularly in relation to accountability, since high-profile collapses of a number of large corporations during 2001–2002, most of which involved accounting fraud. Corporate scandals of various forms have maintained public and political interest in the regulation of corporate governance. In the U.S., these include Enron Corporation and MCI Inc. (formerly WorldCom). Their demise is associated with the U.S. federal government passing the Sarbanes-Oxley Act in 2002, intending to restore public confidence in corporate governance. Comparable failures in Australia (HIH, One.Tel) are associated with the eventual passage of the CLERP 9 reforms. Similar corporate failures in other countries stimulated increased regulatory interest (e.g., Parmalat in Italy).

[SOURCE: HTTPS://WWW.LINKEDIN.COM/PULSE/G20OECD-PRINCIPLES-CORPORATE-GOVERNANCE-2023-MAHMOUD-ELBAGOURY/ ]

 OECD PRINCIPLES: 2023

One of the most influential guidelines has been the OECD Principles of Corporate Governance, published in 1999, revised in 2004, and in 2023. The OECD guidelines are often referenced by countries developing local codes or guidelines.  This internationally agreed benchmark consists of more than fifty distinct disclosure items across five broad categories: Auditing; Board and management structure and process; Corporate responsibility and compliance; Financial transparency and information disclosure; and Ownership structure and exercise of control rights.

The latest OECD Principles of Corporate Governance (2023) are as follows:

1. The corporate governance framework should promote transparent and fair markets, and the efficient allocation of resources. It should be consistent with the rule of law and support effective supervision and enforcement.
2. The corporate governance framework should protect and facilitate the exercise of shareholders’ rights and ensure the equitable treatment of all shareholders, including minority and foreign shareholders.
3. All shareholders should have the opportunity to obtain effective redress for violation of their rights at a reasonable cost and without excessive delay.
4. The corporate governance framework should provide sound incentives throughout the investment chain and provide for stock markets to function in a way that contributes to good corporate governance.
5. The corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, sustainability, ownership, and governance of the company.
6. The corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
7. The corporate governance framework should provide incentives for companies and their investors to make decisions and manage their risks, in a way that contributes to the sustainability and resilience of the corporation.

G-20 Summit 2023 and Corporate Governance

The Leaders’ Declaration issued at the end of the recent G-20 summit, 2023, held in New Delhi, inter alia, underscored the need to address skill gaps, promote decent work, and ensure inclusive social protection policies for all. To achieve this objective, the signatories agreed to:

1. Recognise that well-integrated and adequately skilled workers benefit origin and destination countries alike and commit to working towards ensuring well-managed, regular, and skills-based migration pathways.
2. Welcome efforts to map global skill gaps and the development of the G20 policy priorities to address skill gaps globally, by strengthening our national statistical data, extending the coverage of the ILO and OECD Skills for Jobs Databases to G20 countries, as appropriate, and committing to effectively addressing global skills for sustainable and inclusive economic development.
3. Commit to consider the development of an international reference classification of occupations by skill and qualification requirements to facilitate cross-country comparability and mutual recognition of skills and qualifications.
4. Welcome to a comprehensive toolkit with adaptable frameworks for designing and introducing digital up skilling and reskilling programmes.
5. Aim to achieve sustainably financed universal social protection coverage and consider the portability of social security benefits through bilateral and multilateral agreements.
6. Support progress on the implementation of the UN Global Accelerator on Jobs and Social Protection for Just Transitions.
7. Acknowledge the economic significance and societal value of the cultural and creative sectors to support inclusive growth, sustainable development, and decent work.
8. Ensure adequate social protection and decent working conditions for gig and platform workers.
9. Increase efforts for the elimination of child labour and forced labour along global value chains.

The summit also recognised the importance of harnessing Artificial Intelligence (AI) responsibly for the welfare for all. To this end the signatories:

1. Reaffirmed their commitment to G20 AI Principles (2019) and endeavoured to share information on approaches to using AI to support solutions in the digital economy.
2. Agreed to pursue a pro-innovation regulatory/governance approach that maximizes the benefits and takes into account the risks associated with the use of AI.
3. Undertook to promote responsible AI for achieving SDGs.

India

In India, the SEBI Committee on Corporate Governance defines corporate governance as the acceptance by management of the inalienable rights of shareholders as the true owners of the corporation and of their own role as trustees on behalf of the shareholders. It is about commitment to values, about ethical business conduct, and about making a distinction between personal and corporate funds in the management of a company. The Companies Act of 2013 has brought renewed focus to corporate governance. Some of its key features are:

Diversity and Independence

In public companies exceeding the threshold limit of paid-up capital, turnover, outstanding loans, and so on, independent directors should comprise one-third of the board. Further, a requirement for at least one female director applies to listed companies and other public companies exceeding a threshold limit of paid-up capital or turnover.

CSR Initiatives

The government has adopted the ‘comply or explain’ approach, and no specific penalties are prescribed for non-compliance at present, provided there is adequate disclosure of reasons for failure. However, responsible corporate citizens should set benchmarks for socially responsible behaviour and be wary of reporting a failure.

Board Disclosures     

The Board of Directors should provide several mandatory disclosures in its report related to risk management policy, compliance monitoring processes, CSR initiatives, contracts with related parties, and so on. It should ensure that robust internal processes are in place to support the disclosures, as non-compliance could have severe repercussions.

Internal and External Corporate Governance Controls

The Board should ensure that there are adequate corporate governance controls in place, and are monitored timely. Internal corporate governance controls monitor activities and then take corrective action to accomplish organisational goals. External Corporate Governance Controls encompass the controls external stakeholders exercise over the organisation.

Financial Reporting and Independent Auditing

The board of directors has primary responsibility for the corporation’s external financial reporting functions. The Chief Executive Officer and Chief Financial Officer are crucial participants, and boards usually have a high degree of reliance on them for the integrity and supply of accounting information.
Current accounting rules under International Accounting Standards and U.S. GAAP allow managers some choice in determining the methods of measurement and criteria for recognition of various financial reporting elements. The potential exercise of this choice to improve apparent performance increases the information risk for users. Financial reporting fraud, including non-disclosure and deliberate falsification of values, also contributes to users’ information risk. To reduce this risk and enhance the perceived integrity of financial reports, they must be audited by an independent external auditor who issues a report that accompanies the financial statements.

One area of concern is whether the auditing firm acts as both an independent auditor and a management consultant to the firm they are auditing. This may result in a conflict of interest, which places the integrity of financial reports in doubt due to client pressure to appease the management. The power of corporate clients to initiate and terminate management consulting services and, more fundamentally, to select and dismiss accounting firms contradicts the concept of an independent auditor. Changes enacted in the United States in the form of the Sarbanes-Oxley Act prohibit accounting firms from providing both auditing and management consulting services. Similar provisions are in place under clause 49 of the Standard Listing Agreement in India.

In spite of all these framework regulations, some systemic problems continue to plague corporate governance. These may be: demand for information; monitoring costs; and supply of accounting information.

Concluding Remarks

Whichever way we look, governance, public as well as corporate, appears to be in a perpetual crisis mode. Public governance is unable to meet the rising expectations of the people, and often suffers from policy paralysis on account of being pulled in different direction by warring interest groups. This, no doubt, affects corporate governance, which is beset with its own malaise of a peculiar kind of innovative greed. As Mahatma Gandhi said, there is enough on this earth for everyone’s need but not for everyone’s greed.

To control the corporate greed, various countries are making more and more stringent laws to introduce transparency in their functioning and enforce accountability, particularly against the backdrop of ESG ecosystem. However, laws will never be enough, as novel methods to bypass them are being found all the time. The need of the day is to internalise the universal message of sustainability in all its dimensions. The earlier we do it the better it would be for long term survival of all concerned.