Sunday, 25 October 2020

KhabarExpress.com : Local To Global News

Corporate Governance and Role of Company Secretary


Corporate Governance:

As per The Institute of Company Secretaries of India (ICSI), Corporate Governance is defined as : The application of best management practices, compliances of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

The main objective of Corporate Governance policies and practices should be wealth creation, wealth management and wealth sharing. Adherence to laws and regulations, financial goals and communications with stakeholders are major factors that make up the way in which corporations is governed.

Frits Bolkestein, the European Unions internal market Commissioner highlighted some of the wider impacts of corporate governance in a speech. “Economies only work if companies are run efficiently and transparently. We have seen vividly what happens if they are not- Investment and jobs will be lost and in the worst cases –of which there are too many- Shareholders, employees, creditors and the public are ripped off.”

The financial meltdowns of Enron, Tyco, AIG, WorldCom, and Xerox have increased the concerns about corporate governance, which is system of regulations and policies to hold corporate leaders accountable and protect company stakeholders.

The most important feature of ICSI definition on Corporate Governance as discussed above is that corporate governance practices should be adhered to in letter and spirit. It is high time for companies to embrace the spirit of the corporate governance practices rather than settle for the chore of compliances.

Hence, to create, manage, share the wealth, only an inclusive approach to corporate governance can sustain. For this inclusive approach, the model of corporate governance should be such that it promotes the interest of all the stakeholders, namely the employees, customers, shareholders, investors, creditors, the community at large.

According to me, the top five mechanisms, which are vital for implementing better and effective Corporate Governance in any organisation, are:

1.           Independence of Board
2.           Role of Auditors (Internal and Statutory) and Audit Committee
3.           Whistle Blowing
4.           Shareholder Activism
5.           Fast Track Redressal Forums and Independent compliant mechanisms.

Any code on corporate governance can only provide the framework or structure to ensure that companies are governed to the best interest of stakeholders at large.

Company Secretaries are the Flag bearer of Corporate Governance and have to perform the role of whistleblower in best interest of the Company and Society at large.

A very famous quote by Napoleon:
“The World suffers a lot not because of the violence of bad people but because of the silence of good people.”
Economic Volatility, Global Competition, Growth risk appetite demands the governance professionals, the Company Secretaries to priorities their role as whistle blowers.

Employees are usually the first to witness dangers and wrongdoings on Job. Although most employees remain silent, many chase to speak out and bear witness in corporate crimes that has not been addressed when flagged through normal company channels i.e Corporate Security, Audits, Inspections, Law enforcement combined.

Company Secretaries rank among the most productive, valued and committed members of their organisations. As they are the part of Top management and Board of Directors, they have a strong conscience; they are committed to formal goals of their organisation and have strong sense of professional responsibility.

Company Secretaries is also Corporate Governance Officer (CGO) and required to perform following roles :

 

1.           To ensure the effective running of the activities of the Board and its Committees.
2.           To ensure compliances of all listing rules, other Regulatory Codes and Acts.
3.           Keep under review all legal and regulatory developments affecting the company operations and make sure that directors and management are properly informed of the same.
4..           Manage relations with all stakeholders with regard to Corporate Governance, Corporate Social Responsibility, etc.
5.           Work with Board of Directors, Management to ensure that all regulatory reporting is correct and does not lead to errors resulting in offences under Various Acts.
6.           Act as the Conscience Keeper of the Company.
7.           Act as the Primary point of contact for Board of Directors and source of guidance in order to assist their decision making process.
8.           To assess, manage the compliances in the governance domain, governance processes, tracking of outcomes of governance processes and disseminate the information and documents for proper governance.

 

In ensuring implementation of proper corporate governance practices in the organisation, Company Secretary requires Governance Management and Reporting which includes:-

 

1.           Development of Board framework and to determine the level of Independence
2.           Monitoring and reporting on the Independence of Audit Committee
3.           Development and Maintenance of a Board Charter to ensure that Board decisions can be measured against it.
4.           Acting as Board voice for providing shareholders feedback.
5.           Participating in Strategic Planning process, Risk Management process, Internal Control process, MIS, Corporate Communications, Succession Planning, Board performance evaluation process.

In light of above, Company Secretary acts in the capacity that ensures high level corporate administration in accordance with best governance practices which results to well run, governed and sustainable business for the benefit of its stakeholders at large.

Company Secretary can be useful aid to implement whistle blowing as an internal regulator for ensuring good corporate governance in spirits. As he is a part of Board decisions process and recipient of all important information flowing in the organisation, he can easily smell the rat. He can suspect the improper activities/unethical practices adopted by organisations or some of its members.
Some of the instances of unethical practices/improper activities adopted by certain organisations, which is required to be reported or for which whistle should be blown are:

1.           Theft
2.           Harassment
3.           Unethical practices
4.           Fraud
5.           Dishonesty
6.           Discrimination
7.           Lack of Independence of Board/Committees
8.           Improper Director Remuneration Packages
9.           Lack of Independence of Auditors
10.        Violation of Regulations and Code of Conduct
11.        Insider Trading
12.        Corruption
13.        Bribery
14.        Lack of Work Place Safety Hazards
15.        Financial Statement Misrepresentation
16.        Lack of Proper Internal Controls.

He can also support the ombudsman function with the Board by establishing a symbiotic relationship between the governance and compliance. According to the Association of Certified Fraud Examiners 2010 Report to the Nations on Occupational Fraud and Abuse, 40 percent of fraud cases studied in public companies were detected by tips- three times as many as by any other method. The presence of hotlines i.e may be Audit Committee Chairman or Ombudsman greatly facilitated tip reporting.

Company Secretary can adopt internal or external whistle blowing system. He can make his allegations internally to other people or committees i.e. Chairperson of Audit Committee or any hotline developed by company or can make allegations to external agencies like regulators, law enforcement agencies, media, etc.

Before Reporting or Whistle Blowing, Company Secretary should consider following factors:

1.           Whether he has enough facts and evidences to support his allegations?
2.           Under which situation and circumstances, he should opt for Whistle Blowing?
3.           Whether there is any other mechanism or channel other than whistle blowing for reporting and which system should be opted to blow whistle, Internal or External?
4.           What Protections the Company or law will provide for whistle blowing and whether there are any chances of success?
5.           Whether any actions or investigations will be initiated after whistle blowing i.e. whether management or regulators will positively participate?

Practical Challenges for Company Secretary as Whistle Blower

Company Secretary as key recipient of almost all information can face reprisal, sometimes at the hands of the organisation or group, which he accused, sometimes under law. There is often a fear of losing their relationship at work or outside work. They may get punished, terminated, suspended or at risk of their own well beings. Few instances where whistleblowers have to face harsh consequences to the extent of losing their life:

1.           The Satyendra Dubey Fate (2003), 2. Majunath Shanmugham Incident (2005), and 3. Most recent case of sudden demise of colleague CS Shasheendran (2011).

Hence, in order to encourage whistle blowing as an indispensable ingredient for ensuring good corporate governance in spirit, proper law should be enacted in India which should provides rewards and protection to whistle blowers similar to which is prevalent in USA under Dodd –Frank Whistle Blower rules. Organisations should protect, compensate whistle blowers, proper mechanisms should be set up, and identity of whistle blowers should be protected. Whistle blowing should be made mandatory requirement under Listing Agreement and even disclosures on corporate fraud risks should be made mandatory by Directors in Directors Responsibility Statement annually. Under US Corporate Governance law, Sarbanes-Oxley Act, 2002 has made it criminal offence, which is punishable by fine and up to 10 years in prison, for taking any action harmful to a person who provides truthful information about a federal offence to a law enforcement officer. There should be strict rules for hiding identity of Whistle Blowers, Ombudsman should be appointed by the company for dealing with such allegations who will directly report to Shareholders, Contentions of frivolous complaints should be taken care by imposing heavy penalties on malicious complaints.

Conclusion

Today with Scandals like Satyam, Tyco, AIG, Enron, Worldcom, Zerox, need for more ethical governance has arisen. Whistle blowing has already been described as one of the basic tenets of Corporate Governance, but in India, there is no definite Whistle Blower laws. If this tool of Corporate Governance is used in true letter and spirit, it can be saviour for protecting the stakeholders and the larger public interest. It can be success factor for survival of corporates, build their brand image, which will support in raising funds. It can be effective tool in curbing and reporting corporate frauds, which earlier used to go unreported.

As it is always said, norms of Corporate Governance are not merely to be complied with but have to be adopted as day-to-day practice of any organisation. Hence, Corporate Governance is a mixture of meeting both the letter and spirit of law. It is high time India Inc, which is an emerging economic powerhouse, to strive to raise the standards of Corporate Governance Practices to Global Benchmark.

-Aditya Purohit

 

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