In Governance, Prevention is Better than Cure
The global financial crisis, at its heart, has turned out to be a crisis of values and trust. At the grass roots level, people feel that corporations, driven by individual and/or organizational greed and the pursuit of profit, will stop at nothing to achieve these goals—even at the risk of bringing down entire global economic systems. Whatever commentators predict about the duration and severity of the financial crisis, a full recovery will only occur once trust in global corporations is restored.
This lack of confidence is preventing basic, sound businesses from thriving and is ultimately prolonging the downturn. This is the year that big business needs to work with its stakeholders to restore trust.
The Heart of the Matter
The heart and soul of an organization lies with its values. Transparency of those beliefs, built on sound corporate governance, is the only way for companies to build credibility, restore faith and drive economic recovery. Good corporate governance is about maximizing shareholder value legally, ethically and on a sustainable basis, while ensuring fairness to every stakeholder: customers, employees, investors, vendor-partners, the governments of the countries in which it operates and the community.
Thus, corporate governance should be a reflection of company culture, policies, and the relationship with stakeholders and a commitment to values.
The reality of corporate governance and ethics is this: a large part of a company’s incentives and choices in governance still stem, for better or for worse, from the beliefs of the management and its leaders. Regulations, while crucial, do not play the deciding role in the day-to-day choices of firms, their management and their corporate leaders.
Indian companies, like Infosys , for instance, adopted stringent disclosure norms in the 1980s and 1990s before it was required by Indian law. And the best achievements in corporate governance and ethics by both businesses and their leaders have not been mandated. In fact, well-run companies often show evidence of their beliefs in governance not in their official statements but in the activities they voluntarily take up, for these offer real clues to a firm’s animating ethos.
Today, more than ever, it is essential to build an organization on the foundations of unflinching and non-negotiable value systems. Nevertheless, there is an undeniable truth that for most companies—across the world—effective corporate governance is still a work in progress. No matter how rigorous corporate governance regulations may be, a management bent on thwarting these can still do so, ticking off all the requirements while ignoring their substance. It’s the reason we see corporate scandals emerge each time markets turn bearish and access to capital becomes tight.
We can try to prevent the worst of fraud and the abuse of executive power, with smarter regulation. There is, for instance, a universal need for more independence and authority in company audits, and towards improving the ability of independent institutions to respond to investor concerns.
Both these changes would make it more difficult for rogue managements to swindle investors and destroy fortunes. But in areas where there are no regulations, self-regulation should be put into place. It is the responsibility of the board to ensure absolute transparency in all financial dealings and adhere to the highest level of corporate governance.
But even as we frame better regulation, we have to ensure that a balance exists between government and markets when it comes to sharing economic power. All too often, such scandals compel governments to respond with draconian regulations that hamper the ability of markets to do business. Economies everywhere are still grasping towards the right balance between oversight and freedom.
Practice What You Preach
Infosys has staked its past and future success on being as transparent as possible, publishing metrics that go well beyond those required by law. One of our corporate policies is "when in doubt, disclose." In 1999 we became the first company on the Nasdaq to produce its balance sheet and income statement according to the generally accepted accounting principles of eight countries.
Reminding stakeholders of sound business fundamentals and providing as much information as possible are the best antidotes for fear and uncertainty in the market. Corporations that recognize and embrace the principles of transparency will benefit from a lower cost of capital, the ability to attract talent, and better client relationships. The financial waters are backed up now, but responsible corporate leaders and regulators that prioritize transparency and good governance will have the best chance of reassuring skeptical investors and returning to prosperity.