Corporate governance refers to the system, rules, processes, and practices by which a company must be directed and controlled. It encompasses the relationships between the company's management, board of directors, shareholders, and other stakeholders.
Employees, vendors, authorized sales channel partners, bankers/FI, money lenders, and other business associates are stakeholders.
Corporate governance practices ensure that the company is managed transparently and accountable. The company must have several policies and procedures in place to promote good corporate governance, including:
A code of conduct for directors and employees & outlines the company's expectations for ethical behavior.
A shareholder-rights plan that protects the rights of shareholders to vote on important corporate matters.
A comprehensive financial reporting and disclosure policy.
A whistle-blower policy that encourages employees to report any concerns about the illegal or unethical activity.
This Blog includes the following 8 (eight) processes related to Corporate Governance.
1. Establishing corporate governance framework in the Organisation from statutory regulations perspectives.
2. Identifying Pillars of a Good Corporate Governance Policy that affect all stakeholders
3 to 7. Implementing a Corporate governance framework in the value chain includes interfacing with 5 (five) essential functions such as below and performing 85 (eight five) activities given in brackets.
· Finance and accounts (19)
· Legal and secretarial (17)
· Sales and distribution (17)
· Purchase and materials management (14)
· IT, Systems & ERP (18)
8. Highlighting the approach for implementing corporate
governance framework in additional 6(six) functions which
includes performing 111(hundred and eleven) activities
Activities (including unethical) that can adversely impact the Busines have also been listed towards the end of the blog.
1. Process: Establishing corporate governance framework in the Organisation from statutory regulations perspectives.
Activities in Brief (4)
The statutory regulations to implement corporate governance in India are:
A) The Companies Act, 2013.
B) The Securities and Exchange Board of India (SEBI) Act, 1992, and The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.
C) The National Stock Exchange (NSE) Listing Agreement
D) The Bombay Stock Exchange (BSE) Listing Agreement.
Organizations need to comply with the following requirements to enable the establishment of such a framework.
1)The Companies Act, 2013.
It sets out requirements for setting up the below committees in the organization along with their roles, composition, and powers:
· Board of Directors,
· The audit committee,
· The compensation committee,
· The nomination committee
· Corporate governance committee
It also specifies requirements w. r. t. following.
· Financial reporting and disclosure,
· Shareholder rights
· Corporate social responsibility
These need to be complied with.
2) The Securities and Exchange Board of India (SEBI) Act, 1992 and
SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015
· Composition of the board of directors and roles of Chairman, MD/CEO, and directors
· Setting up board Committees, compensation, roles, etc
· Related party transactions and regulations
· Corporate governance report as part of the annual report
· Shareholder rights-protection of minority rights
· Setting up a Code of conduct for board members and senior management
· Establishing whistle-blower mechanism
These need to be complied with
3) The (NSE) Listing Agreement.
· A Majority of independent directors must be on the board by NSE. This needs to be complied with
4) The BSE Listing Agreement
· Need to have a majority of independent directors on the required board by BSE.
This needs to be complied with
2. Process: Identifying Pillars of a Good Corporate Governance Policy that affects all stakeholders.
Activities in Brief.
The specific elements of corporate governance can vary from company to company, but some of the most common pillars are 4 (four) as below.
Accountability: The company is accountable to its stakeholders for its actions. The company should have a board of directors that must be responsible for overseeing the management of the company.
For accomplishing this
Set clear goals and objectives.
Measure performance.
Provide regular feedback
Hold people accountable.
Reward success
.
Transparency: Transparency enables building trust among stakeholders & enhances accountability. It is essential to be transparent about operations while maintaining business confidentiality from competitors. Being clear, concise, and open to feedback promotes transparency.
Fairness: All stakeholders should be treated fairly. SOP must be in place in all functions. Training must be provided to all employees about company policies.
Integrity
Integrity means adherence to ethical principles and the willingness to act in a way consistent with those values & principles. Integrity enables risk mitigation and builds a reputation for ethical and responsible business practices. It is demonstrated through:
Acting in the best interests of the company
Being honest and transparent
Avoiding conflicts of interest
Upholding the law
Being accountable for their actions
3. Process: Implementing Corporate governance framework in Finance and accounts functions.
Activities in Brief (19)
Accountability:
Set clear goals and objectives for Profitability, Balance sheet & Cash flows, etc.
Measure performance indices at least quarterly
Report financial results to management and board regularly.
Hold F&A accountable for their targets.
Approve all significant financial transactions and take responsibility for all financial transactions.
Establish robust internal control systems.
Implement segregation of duties concepts.
Transparency:
· Maintain accurate financial records.
· Disclose any material risks to the company's financial health.
· Publish comprehensive financial reports that include income statements, balance sheets, and cash flow statements.
Fairness:
In the computation and reporting of profit & loss, balance sheet, and cash flows
Ensure that financial information is accurate and complete.
Avoid manipulating financial data.
In passing invoices of vendors, consultants, contractors, and service providers and payment releases.
In processing claims of dealers, channel partners, and customers towards incentive schemes & expenses and crediting them.
Integrity:
Promoting ethical principles and performing activities consistent with those values & principles in the areas of Finance and accounts.
Enforce a zero-tolerance policy for unethical accounting practices.
Conduct regular audits of the financial records.
Establish a whistle-blower hotline to report any suspicious financial transactions.
4. Process: Implementing Good Corporate Governance Policies in the Legal & Secretarial Function.
Activities in Brief (17)
Accountability:
Set up targets for ensuring 100% statutory conformance and timelines for resolving outstanding litigations.
Carry out audits and measure statutory conformance and timelines
Hold legal teams accountable for facilitating & upholding the organization's legal framework
Approve all purchase orders, contracts, and agreements from legal perspectives.
Ensure that the company complies with all applicable laws and regulations.
Establish robust systems to amend statutory checklists vis a vis ongoing statutory changes promptly.
Protect the company from legal liability.
Report statutory non-compliances to senior management/Board promptly
Transparency:
·Maintain accurate records of legal information such as:
Licenses and approvals
Legal notices, fines, and penalties
Pending litigations, court cases & timely appearances
Statutory audits through specialists
Potential legal risks to the company and sharing with senior management/board
Corporate governance-related conformances
Fairness:
In presenting company cases before judication authorities/courts
In seeking statutory approvals for licenses, product quality, environmental clearances
In rendering legal advice to all functions vis a vis any documents or agreements with vendors & customers, or & business associates to ensure statutory compliance
Ensure no conflict of interest in any negotiations or agreement clauses
Integrity:
Enforce a zero-tolerance policy for statutory non-compliance.
Conduct regular legal audits of the applicable statutory Acts
Protect the company from legal liability
Protect the legal rights of all employees
5. Process: Implementing Good Corporate Governance policies in the Sales & distribution function.
Activities in Brief (17)
Implementing good governance practices to ensure the following:
Accountability:
Setup sales, market share, and sales promotion targets
Monitor actual accomplishments and give regular feedback
Hold the sales team accountable for their results
Transparency:
Disclose pricing structures, terms, and conditions to customers.
Provide detailed product information, including features, benefits, and limitations.
Fairness::
Campaigns sales promotion activities truthfully
Pricing of products, spares, and services
Selection of channel partners/dealers, etc
Design of incentive schemes for channel partners and customers
Pursue fair competition practices
Treat all types of customers fairly
No misleading statements in sales promotion materials
Integrity:
Promoting ethical principles and performing activities consistent with those values & principles in the areas of sales & marketing function.
Establish a clear code of ethics
·Conduct regular ethical audits.
·Raise expenses or & incentives claims that are genuine.
Discharge contractual sales obligations truthfully.
6. Process: Implementing Good Corporate Governance Policies in the Purchase & Materials function.
Activities in Brief (14)
Accountability:
Set clear targets for material costs, value engineering, and continuity of production by ensuring material availability.
Measure Material Costs, inventories & timeliness of materials availability
Hold the Purchase team accountable for accomplishing targets.
Approve all major purchase orders/agreements as per approved authority norms.
Establish procurement policies that are comprehensive w. r. t:
Vendor selection
Bidding process
Negotiations of pricing and terms
Purchase orders and agreements approval authority
Transparency:
·Sample approvals, Quantity measurements, Price computation formula,
· Vendor’s performance evaluation
Fairness:
In Rate negotiations, rate amendments & settling commercial terms.
Vendor selection is based on Quality, technical competence, and ethics.
% Buying mix allocation amongst multiple vendors
Integrity:
· Promoting ethical principles and performing activities consistent with those values & principles in the areas of Purchase & materials function.
· Source supplies from ethical vendors,
· Choose environmentally friendly and statutorily compliant vendors
· Engage in competitive bidding and buying at arm’s length
7. Process: Implementing Good Corporate Governance Policies in the IT, Systems & ERP Function.
Activities in Brief: (18)
Accountability:
Set clear targets for Timelines for setting up IT/ERP Infrastructure for green field projects.
Set clear targets for Timelines for the development or & enhancement of ERP or IT solutions, including in-house or outsourced services.
Set clear targets for IT/ERP costs-Capital & recurring
Set clear targets for Uptime of IT/ERP infrastructure
Set clear targets for Security infrastructure for Physical & logical networks and any security compromise incidents
Hold the IT/ERP team accountable for accomplishing targets.
Establish an IT security policy that is comprehensive. w.r. t: i Hardwares ii Softwares iii ERP modules/ software access iv Network access v Remote access vi A business associate and customer access
vii Authorization profiles & roles in the workflow
Transparency:
Maintain accurate records of IT Hardware resources:
Servers, Computers, workstations, Printers
Network routers, switches, hubs, printers, handheld devices, mobiles, WIFI equipment, CCTV, etc
Maintain accurate records of IT Software licenses for: i ERP ii AI (Artificial intelligence) software bought out iii MS Office or equivalent software iv Engineering Design Software v CAM/CAD software vi Project management software vii Coding language software viii RDMS software ix Utility software x E-mail software xi BI tools/software xii E-mail software xiii Operating software xiv other software xv Maintain accurate records of software developed in-house and outsourced. and so on
Fairness:
In Rate negotiations, rate amendments & settling commercial terms with IT hardware, software, and network vendors.
The vendor selection process is based on Quality IT competence.
Software designing, coding, documenting, testing, and approval processes are robust.
Integrity:
·Promoting ethical principles and performing activities consistent with those values & principles in the areas of IT, systems &ERP functions.
Select ERP/software solutions that enforce strict data integrity and quality controls within the IT/ERP systems.
·Implement data validation checks to prevent errors and fraud.
·Ensure that data input and output are accurate and reliable,
8. Process: Highlights implementing the corporate governance framework in the other
6(six) functions as below, along with no of activities in brackets
· Manufacturing and engineering (21)
· Quality assurance and quality control ( 22 )
· R&D (15 )
· Project management ( 16 )
· Service rendering ( 16)
· HR and Administration (21 )
The narration of these 111 activities is listed, function-wise, under each of the 4 (four) below heads.
· Accountability:
· Transparency:
· Fairness:
· Integrity:
These are included in my 2nd book, “Profitability and Ethics-The key ingredients for business success.”
Links for buying the book from Amazon are as below.
Global
Activities (including unethical) that can adversely impact the business.
· Lack of transparency in business operations.
· Unfair business policies /practices that lead to not balancing the interests of the company, business associates, and customers.
· Senior management indulges in unethical practices, and there is no code of conduct.
· Inadequate or no punitive action on employees, vendors, channel partners, or business associates engaging in unethical activities.
· Weak internal controls and audits
· Inadequate risk -assessment.
· Lack of accountability in implementing corporate governance as performance
Targets/KPIs/KRA needs to be set up for different hierarchical levels in various functions.
· Inaccurate measurement of performance results & inadequate monitoring of Targets/KPI/KRA.