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Corporate Governance_ The 10 Commandments
In a session conducted by CII today, Mr. J.J. Irani – Director – Tata Sons highlighted 10 essential elements (reworded and summarized by the author) that will helps companies to institutionalize a strong corporate governance culture that not only benefits the company, but all the stakeholders at large. For clarifications on any of these elements, you may reach out to firstname.lastname@example.org who will help with the necessary clarification.
1. Corporates should have their own code of conduct and governance guidelines. Good corporate governance is akin to good manners. There has to be a voluntary commitment. If enforced and forced down the throat, it can have negative consequences. Hence, companies should take efforts in adopting the good corporate governance practices as relevant to its own setup.
2. The office of the Chairman and the CEO should be separated to provide the right balance of execution and oversight responsibility. With the same person hold both offices, the Board of Directors decisions tend to sway towards the management rather than an independent and unbiased decision.
3. Audit Committee should consist of Non executive directors who is normally the chairman of the Audit Committee of the Board.
4. Independent directors need to build a consensus and to collectively raise the concerns and issues to the executive team. A single independent directors will not have a great say and will not be able to influence a decision. The collective efforts of the outside directors creates the necessary impact for good corporate governance.
5. The Board of directors is not a “Club” of independent directors. The Chairman and executive team should not induct independent directors on the basis of past associations, relations or friendship. The appointment has to be without bias and should prevent friends on board solely to gather support in terms of votes.
6. The Head of the Internal Audit Department should report to the Chief of Audit Committee who, as mentioned above, is the Independent Director. This truly results in independence of the Internal Audit Function.
7. Whistle Blower policy is a must in any organisation.
8. Peer pressure on defaulting companies and fraudulent companies is a must. Besides , hard action taken by Regulators, soft action should also be taken by the peers, intermediary etc. Example could be expulsion of the defaulting company from membership of a Chamber of Commerce or other such body. Such negative actions are picked up well by the media and can have great positive benefits.
9. There should be a discouragement of building strong nexus between top management and political parties / leaders. This will help build stronger and more acceptable corporate governance.
10. Finally, and one of the most important point is to introduce a law that will protect the independent directors so that they are encouraged to take these positions. Currently, due to the fear or criminal and corporate actions, most eminent and well experienced professionals and not willing to take positions of independent directors. The fear is just, but unwarranted. We just need to change the environment in which they operate and this will open doors to great governance practices.