Global trends towards a stakeholder-centric governance model have resulted in a structured movement towards responsible business conduct. Companies are more involved in creating an ecosystem of growth and sustainability. Integrated corporate governance is the essence of stakeholder capitalism. Companies are driven not only by profitability but also by the increasingly relevant non-financial parameters measured through impact on society and the environment. In a business environment affected by COVID, ESG considerations would continue to be at the forefront with Boards who likely focus on long-term value creation.
At a time of change we find resilient companies do better, getting hurt less during downturns, better managed and prepared compared with the competition. Resilient companies have systems in place for bad times, are relentless about improving performance, and make decisions skillfully. Stakeholder capitalism can be an additional element which can bring together all of these attributes into a stronger whole. The MCA's recommendations on the BRSR framework is timely and will allow for standardisation of ESG-factors as well as bring greater quality and accuracy to such non-financial reporting.
BRSR framework is closely linked with stakeholder capitalism. It is based on 9 basic principles of the National Guidelines on Responsible Business Conduct (NGRBC). The framework pertains to businesses being ethical, transparent, and accountable. Provisioning goods and services in a sustainable manner, ensuring the well-being of employees – including those in their value chains, being protective of the environment and mindful of sustainable production, responsive to all stakeholders, promoting human rights, complying with the regulatory framework, promoting inclusive growth and facilitating equitable development and consumer welfare are all important parameters in this report.
Looking at stakeholder capitalism:
If stakeholder capitalism is to be more than an optimistic vision, it will require this integration to become better defined in operational and governance terms and such practices adopted in widespread fashion by Boards. This agenda is relevant for any Board or company that is serious about absorbing the deeper lessons of the current crisis for their firm and translating the principles of stakeholder capitalism into practice. The structure of the BRSR format is segregated under essential (“mandatory”) and leadership (“voluntary”) indicators. The leadership indicators in the BRSR format also include disclosures related to the value chain of the listed entities. This is in line with the thrust of the NGRBCs on responsibility of businesses to encourage and support their value chain in following the same ESG principles. The companies have to ensure it has the building blocks in place that will enable and ensure responsible business conduct. It reflects the belief that policies and processes are foundational in nature to ensuing action. Thus, huge duty is trusted upon the Board of Directors who has to ensure systems and process is in place.
Regulatory framework for Corporate Governance
Corporate governance is the system by which companies are directed and controlled. Corporate governance helps to build an environment of trust, transparency and accountability necessary for fostering long-term investment, financial stability and business integrity, thereby supporting stronger growth and societies that are more inclusive. The Ministry of Corporate affairs says that the Board of Directors has to exercise strategic oversight over business operations while directly measuring and rewarding management’s performance. Simultaneously the Board has to ensure compliance with the legal framework, integrity of financial accounting and reporting systems and credibility in the eyes of the stakeholders through proper and timely disclosures. Thus, the Board is unilaterally responsible to the internal workings of the company including the shareholders and externally to the stakeholders. Corporate governance is seen as crisis induced. Ever since India's biggest-ever corporate fraud and governance failure unearthed at Satyam Computer Services Limited, the concerns about corporate failures and what is good Corporate Governance is debated and streamlined.
The Covid-19 crisis is accelerating a shift toward a more integrated approach to corporate governance that has been gathering force for some time. The pandemic has put people’s lives, livelihoods and learning at the center of the public policy and business response in almost every country and industry sector. It has dramatically underscored the need for firms to engage proactively and systematically with diverse stakeholders, both internally and externally.
The Indian statutory framework for corporate governance has evolved over the years. It is, largely in consonance with the international best practices ensuring common parameters for comparison on world platform. A prescribed balance ensures an appropriate basic framework that needs to be complied with by all companies without sacrificing the required discretion and business judgment in the interest of the company and the stakeholders. The liability of compliance is in context of the common law framework prevalent in the country along with a wide variety of ownership structures including family run, controlled, or otherwise closely held companies.
Broadly speaking, the corporate governance mechanism for companies in India is enumerated in the following:
1. The Companies Act, 2013 which enumerates provisions relating to board constitution, board meetings, board processes, independent directors, general meetings, audit committees, related party transactions, disclosure requirements in financial statements, etc.
2. Securities and Exchange Board of India (SEBI) Guidelines which enumerates rules governing compliance for listed companies and which issues regulations, rules and guidelines to companies to ensure protection of investors.
3. Standard Listing Agreement of Stock Exchanges specifically deal with companies whose shares are listed on the stock exchanges and have public money at a larger scale invested in them. Here transparency and accountability are important facets.
4. Accounting Standards issued by the Institute of Chartered Accountants of India (ICAI) and Secretarial Standards issued by the Institute of Company Secretaries of India (ICSI) provide guidelines for disclosures of financial information. They certify that the financial statements shall give a true and fair view of the state of affairs of the company and internal management of the Board has been , in accordance with the Secretarial standards.
Age of non-financial disclosure:
Companies, world over are moving to fundamental purpose of – sustainable value creation. Firms are proactively and systematically engaging with diverse stakeholders, both internally and externally with an intrinsic interest in and shared responsibility for the resilience and vitality of the economic, social and environmental systems in which they operate. These include research and innovation, employee well being, talent development, corporate culture and respect for human rights, and strengthening external stakeholder relationships and trust. Companies have intensified their focus on intangible drivers of value. The Board of Directors are expected to provide oversight on the material risks these pose to the company’s own financial condition and operating performance as well as the salient risks their company’s activities pose to people and the environment. In addition, they must be able to rigorously evaluate alternative investment, innovation and technology options for mitigating current risks and avoiding future ones. Current business scenario is rife with Systemic crises and shocks which is seen ranging from financial crises, recession and political conflicts to natural disasters, the impact of climate change and pandemics. It is expected that the Board will play a crucial role in providing oversight of their company’s ability to respond to and recover from these. This is the reason why the current format of BRSR, which is based on internationally accepted, reporting frameworks such as GRI, SASB, TCFD, Integrated Reporting, includes Leadership Indicators. It can be seen that the Report seeks the Boards assistance in not only ensuring the reliability of the Report but also the implication and leadership decision taken by the Board in different scenarios. Boards have a greater stake than ever in the health of their company’s operating context, particularly the strength of the social fabric and the norms and public institutions that underpin the functioning of rule of law, respect for human rights and fair and efficient markets in jurisdictions with significant operations.
Boards to lead
The idea that companies need to adopt leadership positions is gaining momentum. In India Non financial disclosures has become need of the hour. Business Responsibility & Sustainability Reporting shows that it is expected from the companies that they would comply with not only the government mandated regulations but will also take leadership positions. Thus, it will take decisions in line with what is important and required for the world at large. Big multinational Corporations are springing all over the world, as was dreamed during conceptualisation of Globalised world. Nevertheless, this also means that business decisions are now impacting a larger population and hence more than just shareholders the decisions will have to be stakeholder driven.
Stipulation and clarification of the duties and responsibilities of the directors of a company, especially the public limited companies, under the Companies Act of 2013, are aiming better corporate governance and security, and the best possible growth and prosperity in the corporate world of India. The former company law of India, the Companies Act of 1956, was deficient in this respect. The new Companies Act 2013 can be seen as offering a landmark piece of legislation in this regard, which duly and explicitly clarifies, redefines, and enlarges the ambit of duties and responsibilities of the directors. The duties and responsibilities of the directors, including the independent directors, provide greater certainty to the directors regarding their conducts and responsibilities. Thus, the Act ensures better and impeccable corporate management and governance. It enables and empowers the beneficiaries, regulators, and the courts, to judge, regulate, and control the activities and obligations of the directors more objectively and effectively.
Leadership by the Board has to ensure the right balance between Committee-based work and integrating these issues into full Board discussions. These discussions have to focus on corporate purpose and culture, strategy, risk management, scenario and competitiveness analysis. As part of Corporate Governance major investment decisions, business planning, target setting and performance oversight, executive compensation and succession planning are part of Board discussion. However, taking it further Boards and management need to prepare the company’s mainstream disclosures in an integrated fashion that combines financial reporting with reporting on material ESG risks and opportunities. What is increasingly felt is that increased materiality of these factors requires well-governed corporations to reflect them in their mainstream disclosures and to ensure greater transparency and accountability. Thus a much more evolved Corporate Governance Code has to be seen in practice. Leadership roles have to be etched into the Corporate Governance code. There needs to be diversity of director skills, experiences, gender, race, nationality and age. In addition, Boards need to increase internal engagement, including but beyond the company’s executive management team, as well as engagement with external stakeholders from investors to scientific, community and government leaders.
Integrating Leadership and Corporate Governance:
Leadership can be defined in different ways that it is hard to come up with a single working definition. Leadership is not just a person or group of people in a high position. Leadership is a process in which leader is indulged in various activities to achieve any goal. For Companies to survive and prosper in the right context the importance of understanding and practicing leadership and governance concurrently is certain. Academic research shows that despite the long-standing focus on areas of leadership and its impact on organisational behaviour and governance and its risk management are similar phenomena they are rarely discussed together. Each area has evolved into important fields of study with development taking place parallel. It is often seen that principles of corporate governance is adopted as response to crisis and not only for better practice. However, it will be useful to explore the relationship between governance and leadership so that corporates can utilise the two tenants that will prove key to the success of an entity.
Leadership plays the role in developing systems through which an entity can be effectively governed. Leadership and Governance are at their finest when they are in inter-reliant relationship. They have to depend on each other to achieve optimum benefits. Leadership provides impetus to make corporate governance effective. Leadership behaviours create corporate culture that uses effective governance to achieve purpose. The principle of leadership relates to the ability of the organisation to set the tone from the top by clearly communicating company strategy, culture, values and behaviours and by demonstrating how these are embedded through the organisation.
Leadership styles practiced in corporates can be a good measure of how much leadership influences corporate governance in corporates. Leadership styles can be broadly classified into following styles:
Authoritarian leadership styles allow a leader to impose expectations and define outcomes. This kind of leader has charisma and can engage others to follow his mission. Although this is an efficient strategy in time-constrained periods, creativity will be sacrificed since input from the team is limited. The authoritarian leadership style is also used when team members need clear guidelines. Such strong leaders often fail to establish the governance structure needed to ensure their legacy outlives them. Its strategic vision depends on the judgment of one person
Participative/ Democratic Leadership
Participative leadership styles are rooted in democratic theory. A lot of effort is put into consensus. Team members thus feel included, engaged and motivated to contribute. The leader will normally have the last word in the decision-making processes. However, if there are disagreements within a group, it can be slow and cumbersome. The adoption of corporate governance principles can take time being deliberated on in various committees, which can make decision process long, and implementation even longer.
Also known as "laissez-faire leadership", a delegative leadership style focuses on delegating initiative to team members. This can be a successful strategy if team members are competent, take responsibility and prefer engaging in individual work. However, disagreements among the members may split and divide a group, leading to poor motivation and low morale. It is possible for corporate to have good corporate governance principles under this leadership because the culture allows individuals to strive for enhancement of systems.
Transactional leadership styles use "transactions" between a leader and his or her followers - rewards, punishments and other exchanges - to get the job done. The leader sets clear goals, and team members know how they'll be rewarded for their compliance. This "give and take" leadership style is more concerned with following established routines and procedures in an efficient manner, than with making any transformational changes to an organisation.
In transformational leadership styles, the leader inspires his or her followers with a vision and then encourages and empowers them to achieve it. The leader also serves as a role model for the vision. It is the most valuable form of leadership. It is strategic in nature. Leader motivates employees and enhances productivity and efficiency through interaction and high visibility. Corporate governance principles are not seen as hurdles but as tools to enhance corporate strategy and systems.
In practice, corporate boards are at the nexus of a number of relationships that constitute the corporation. The formal and informal relationships between the board and shareholders and between the board and senior management are core, but, in many cases, the board will also be at least in dialogue with company creditors, customers, suppliers and employees, as well as the government and community. Such consultation and negotiations are encouraged by corporate governance guidelines and are now seen as necessary rather than optional by the board. Leadership, or inﬂuence, may ﬂow both in the same direction and against formal accountabilities envisaged in traditional views of governance. While the board formally delegates authority to management, the board is dependent on management for information. The conﬂuence of these countervailing forces produces a zone for negotiation. Board decisions, especially where dominated by non-executive directors, are a product of the board’s determination and persuasiveness rather than the pure exercise of ﬁat and establishment of formal systems of reporting (Bainbridge, 2003). It is imperative to recognize that law cannot specify corporate governance in its entirety. Several behavioral norms cannot be addressed through a legal framework. There is, therefore, space for Corporate Governance Codes to supplement and strengthen the legal provisions. According to "Sustainable leadership: Talent requirements for sustainable enterprises," a study on models of sustainable leaderships from Russell Reynolds Associates and research from VU University, social pressure in society is contributing to a shift in the type of leadership of corporations. Companies need leaders who can balance both the pressure of short-term goals and priorities along with long-term goals and incorporate a new set of ideals centered on improving social and environmental issues in the world. Sustainable leaders need to have an open mind, integrity, continuous learning and education. Much like champions of good corporate governance. Integrating leadership and corporate governance is a complex topic and actually putting into sustainable practice is more complicated. Simply put, Leaders are an organisation’s brand ambassadors. Leadership is top management behaviour that demonstrates honesty, integrity, trust, fairness.. They are the public face of its value system and act as influencers and message drivers. Sustainable leadership powered by good corporate governance code is not only something that can help end poverty, it can also help a company’s bottom line.