A friend of Mr J R D Tata once spoke of the numerous times he lost the pens he would carry. He was concerned about his carelessness, and declared that he was going to use only cheap throw away pens. JRD told him to buy a really expensive pen instead, and see what happens. The gentleman did purchase a rather expensive pen. Six months later, the two bumped into each other. On enquiry, the friend declared that he had not even misplaced the pen since purchase. JRD explained to him that the value of the pen had ensured he took care, so he didn’t lose it. Ergo, what you value you take care of!

Governance is essentially ‘taking care’. The minimum expectation from Directors is that they take due care. Especially because, unlike the pen in the example, Directors are trustees of other stakeholders’ interests, not merely their own.

On December 8, 2015, at the 10th CII Corporate Governance Summit, SEBI Chairman, Mr U K Sinha spoke passionately and at length. He closed his speech with the remark that “Governance is not an encumbrance, it is needed for the very survival of a corporation!”

Since 2008, Governance lapses have become the focus of regulators all over the world, starting naturally with the USA. On January 7, 2009, with Satyam CMD Ramalinga Raju’s declaration that he had fudged the company’s accounts to the tune of roughly $ 1.47 billion, India woke up to the need for a tougher legal regime to ensure better Corporate Governance in India. In the US and in India, in the last 2 years, market regulators have levied record fines or penalties for regulatory non-compliances. Whether they were instances of egregious compliance violations or even corporate mis-/non-governance, the question most asked was – “What was the Board doing?” or “What was the rest of the Board doing?”..

That catch-all question leads to the following key sub-questions:

–          Who is the Board responsible to/for?

–          What is expected of the Board?

–          How does the Board fulfil these responsibilities?

The Board of any Corporation is responsible to three key stakeholders:

  1. The Shareholders, who brought the corporation into existence
  2. The Customers, who are the reason for the corporation’s existence
  3. And, the Employees, who ensure the corporation’s existence

Also, apart from these 3 ‘existential’ stake-holders, there are two others who provide the corporation and all other citizens (juridical or flesh-and-blood) the environment in which to conduct business, survive and grow, and they are –

  1. Regulators, focused on protecting the less-powerful
  2. Society at large, for whom CSR regulations have been issued

Boards that value their responsibility to these five stakeholders take the necessary care. Where the law is an ass, as can sometimes happen, they work with their peers to convince the regulator to change the regulations rather than stay non-compliant.

How can Directors ‘take care’? In this blog next week, let us discuss that.