Corporate governance has gained more mi­nd space in the recent past because of what corporate India has witnessed. We had different people react in different ways to the issues at hand. When we talk of corporate governance, what co­mes to mind are independent directors and auditors. However, there are other third parties involved in following good governance practices. These are lawyers, analysts, valuers, ba­nkers, financial institutions, internal auditors and so on. The list can go on, but the role of each of these by themselves does not ensure whether a company follows good corporate governance.

What we tend to forget is the role of the promoter in ensuring good corporate governance. Before delving into the role of a promoter, we should realise that all companies ne­ed to exist, thrive and flourish in civil society. The governan­ce standards of civil society sh­ould be kept at the back of our minds as we evaluate governance standards for corporate India. Hence, the government along with civil society needs to play a role in cleansing the system. Keeping this in mind, let’s look at the role of the promoter.

Clause 49 was the first major piece of legislation that br­ought governance into focus. All listed companies were required to comply with various matters listed there. How did corporate India react? Most companies complied. The qu­estion is whether they compli­ed in form or spirit? Each company and each promoter needs to answer this question.

While a number of companies have transitioned into setting new standards in corporate governance, many are still struggling with the same. The reason for this can be found at the root of the legislation itself. The level of aw­areness of what is required is not well spread. Hence, the government should take the active support of various organisations and spread the message to all concerned.

Second, there is no clear empirical evidence that good governance leads to better results. This has kept a number of people from walking this path, though there may be companies that have followed good governance practices being handsomely rewarded by the stock market. This premium can be realised when other companies embark on a mission of following good governance standards in spirit.

Governance is not what is practiced in the boardroom. It needs to run right across the organisation. This is where the promoter has an important role to play.

First and foremost, there sh­ould be clear delinking of ownership from management. The management of a company should be in competent ha­nds. This will help attract good and high quality talent. Wealth distribution, career path, re­co­g­nition and independence are important factors that attr­act talent into any organisati­on. Succession planning beco­mes a key topic for promoters, as it determines the sustainability of an organisation a­nd paves the way for a better managed and governed company.

Second, there should be a clear distinction between operational management and governance of a company. This involves how directors are inducted into the board. Is it an old boys club? Is the board ma­de up of competent individuals, who are there because of merit and add value to the pro­cess? Their opinions are respected and they are allowed to function and discharge the responsibility of duty and care that is enforced on them because of them being directors. A company spends adequate time in educating these directors about its operations and other relevant matters. These directors are allowed access to senior executives as well as auditors and internal auditors in separate one-on-one meeting without the promoters.

Promoters should ensure that all transactions with the company by inter-related parties should be at arm’s length and should test the scrutiny as any other contract or agreement does. It is important that all directors, including promo­ters, be subject to evaluation by the other directors. This will ensure there is transpa­rency with regard to the remuneration fixed for the directors through an independent remuneration committee.

Promoters need to set high standards by their own attitude in establishing and following governance. The tone at the top will determine the level and attitude to corporate governance.

While saying this, it is important that the timing in the lifecycle of an organisation is appropriate for any corporate governance initiative to be sustainable and real. There is no “one magic formula” to determine the appropriate timing. Promoters tend to be focused on growth. Some times, when diverting their attention or focus to very stringent controls, they tend to develop “fear of outcomes” and don’t progress, and their organisati­ons die a natural death. Once they grow, it becomes a ch­ange management process to sensitise employees on governance practices.

The right timing may vary for organisations, but if governance is a value that the promoter lives by, it becomes easier to percolate down to the last employee in the chain. Each promoter may have his own style. So trying to fit “one size” for governance may not work. It is, therefore, best for each promoter to determine what works for him and the organisation.

We can conclude that a pr­omoter, by discharging his role, can be a key differentiator for good governance, which wo­uld be a win-win for all stakeholders and the society at large.

The writer is COO, KPMG India. These are his personal views