THE GIST of Editorial for UPSC Exams : 15 october 2019 (Good conduct leads to good corporate governance (The Hindu))

Good conduct leads to good corporate governance (The Hindu)

Mains Paper 4: Ethics
Prelims level: Not much
Mains level: Corporate Governance

Context

• Good conduct automatically results in good governance and bad conduct is the prescription for corporates to go downhill over a period of time.
• Most corporates ignore the virtues of the behavioural aspect of governance in their quest of seeking rapid growth and chasing profits.
• This set me on the exciting journey of discovering the difference between corporate governance and corporate conduct.

Governance

• Governance is the process whereby elements in society wield power and authority and enact policy and decisions concerning public life, and economic and social development.
• Extending this concept to corporate governance, it means the manner in which the management prescribes conduct of the organisation.
• This also means that governance is overarching, and conduct is the way of executing governance.

An ideal design for good corporate governance

• By design, good corporate governance means abiding by the laws and regulations in letter and spirit and ensuring that all statutory obligations are discharged on time.
• It also encompasses the manner in which board and committee meetings are conducted and the decisions minuted.
• Corporates that are obsessed with full compliance will leave no stone unturned in adhering to the letter and spirit of laws and regulations.
• They probably constitute 10 per cent of the corporate population. The other extreme is some corporates taking a considered view that penalties are cheaper than adhering to regulations, more so considering the overall cost of compliance.
• For them the stigma of non-compliance is a non-issue. These constitute, say, 10 per cent of corporate population.
• The balance 80 per cent form the safety net group where compliance is respected and followed in letter but may not be fully in spirit.
• They would take multiple legal opinions for an adventurous route and back themselves that it will finally succeed in the Supreme Court.
• There is an overall feeling that there are too many regulations and the costs of compliance and litigation are disproportionately high in India compared to global standards.

Transparency

• Good corporates believe in a full and fair disclosure of their approach to all stakeholders.
• Chairman’s speech, board report, management discussion analysis and notes on accounts to financial statements are areas where one can judge the quality of full and fair disclosure of corporates.
• Disclosure of all accounting policies, managerial remuneration and related-party transactions in a fair and transparent manner is a requirement in today’s corporate regulations.
• Also, disclosure of other non-financial matters such as conservation of energy, technological absorption, etc., are reported more like a statistical information rather than in a detailed cogent manner.

Conduct

• The value system of every company is imbibed in the day-to-day conduct of the top management.
• Corporate conduct consists of two parts: conduct vis-à-vis internal management (workforce); and conduct vis-à-vis external stakeholders — other shareholders, vendors, regulators, customers, etc.
• Corporates that spend enough time and energy in adhering to good conduct emerge clear winners in the race to the final destination of excellence.
• Corporate conduct also flows from the personal attributes of the leader. If he swipes the access card first coming into office, then others will follow and come on time.
• Though we live in an age of flexible timings, good corporate conduct at the top always sets the example of early entry into office and late exit from office.

Element of personal expenses

• Another example of good corporate conduct is where companies ensure that no element of personal expenses is charged to the company’s account.
• There are enough checks and balances in the areas of propriety in the Companies Act and Income Tax Act to ensure that personal expenses are not charged to revenue.
• However, shades of grey are visible where some of the expenses have both official and personal elements.
• The feeling in corporate sector is that “all expenses are official, unless proved otherwise”.
• Corporates with good conduct ensure that every item of expense is official and there are no shades of personal element involved.
• Corrective measures are possible, provided corporates believe that they need corrections. It is here an enlightened board can step in and engineer the required corrective measures.

Model code of conduct

• Tata Motors: The TATA code of conduct embraces the spirit of i-PURE, namely Integrity, Pioneering, Unity, Responsibility and Excellence. The box relating to integrity epitomises ideal corporate conduct. It says, “We will be fair, honest, transparent and ethical in our conduct; everything we do must stand the test of public scrutiny.”
• Google: The Google’s code of conduct has two distinct compartments: The first relates to the external world which can be termed as PRAISE-U: Privacy, Responsiveness, take Action, Integrity, Security, freedom of Expression and Usefulness.

Conclusion

• With so many first-generation and start-up companies coming up it is vital to instil in them the importance of good governance and good conduct.
• Training sessions on corporate governance should have modules on good conduct which alone will ensure sustained and profitable growth for corporates.
• The best CSR (corporate social responsibility) that corporates can undertake is first ensuring that they conduct themselves with decency and courtesy while dealing with stakeholders and the community at large.

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Prelims Questions:

Q.1) Consider the following statements regarding Micro Units Development and Refinance Agency (MUDRA) Bank:
(1) MUDRA Bank lends directly to the micro entrepreneurs/individuals.
(2) MUDRA loans can be availed of from nearby branch office of a bank and Micro Finance Institutes (MFIs) but not from Non-Banking Financial Companies (NBFCs).
(3) The Tarun category under MUDRA scheme has a provision of a loan upto a limit of Rs 50,000.

Which of the statements given above are correct?
(a) 1 and 2 only
(b) 2 and 3 only
(c) 1, 2 and 3
(d) None of the above.

Answer: D

• (MUDRA is a refinancing Institution. MUDRA do not lend directly to the micro
  entrepreneurs/ individuals. Mudra loans under Pradhan Mantri Mudra Yojana (PMMY) can be availed of from nearby branch office of a bank, NBFC, MFIs etc. Under the MUDRA scheme, there are following three categories:

1. Shishu category covers loans up to Rs. 50,000.
2. Kishore category covers loans above Rs. 50,000 and up to Rs. 5 Lakhs.
3. Tarun category covers loans above Rs. 5 Lakhs and up to Rs. 10 Lakhs.)

Mains Questions:
Q.1) How good conduct leads to good corporate governance? Comment.