A red pen moment for corporate governance

News: A lapse in Corporate Governance was observed recently in the conduct of the former Managing Director of National Stock Exchange (NSE).

What are the challenges in ensuring effective Corporate Governance?

Managerial Misconduct: There were several managerial misconducts at NSE. As in the recent case, the board did not include discussion of the chief strategic adviser’s  appointment in the minutes of meeting. It also allowed the former Managing Director’s resignation on liberal terms instead of taking action against her. Public interest directors failed to keep SEBI informed about on-goings at NSE.

Ineffective board members: Here the problem is structural. It involves two crucial factors a) the methodology of selection of board members b) absence of penalties when directors don’t live up to the mandate.

Board members are selected by top management. Board memberships are lucrative and carry attractive perks. So board members have an incentive in giving consent to what management wants. Challenging management may mean losing renewal and even provoking colleagues.

What steps can be undertaken to improve Corporate Governance?

Recruitment of independent directors: Top management should allow choosing not more than 50% of the independent direction. The rest of the members should be selected by other stakeholders like financial institutions, banks, small shareholders, etc.

Accountability: There is a need to make the board members accountable for the lapses in the system.  Regulators should penalize board members through various instruments like financial penalties, removal from board and permanent member from board membership. Apart from the board members, regulators should also be held accountable.

Independent audits: Audits of all the regulators should be done by a panel of eminent persons. The audit should evaluate the regulators’ performance in relation to their objectives.

Source: This post is based on the article “A red pen moment for corporate governance” published in The Hindu on 22nd February 2022.