Ethics

KEY POINTS

·         As corporate India’s health is critical for India’s future, sound corporate governance needs to be the key enabler to manifest this reality.

·         India, like other countries in Asia, has not had much time to change from a promoter-led “insider” corporate governance system.

·         In insider systems, the biggest issue to deal with is the conflict of interest between strong promoters and weaker minority shareholders.

·         Promoters’ controlling stakes provide manoeuvrability in the initial stages of corporate life.

·         But several studies highlight the succession problems family owned businesses invariably face.

·         These values and blind biases often resulted in bad governance.

·         Embracing corporate governance best practices is important for family managed firms not just for protecting minority shareholder interests but also for ensuring the survival of the firm itself.

·         Yet, awareness and voluntary acceptance of best practices never have been forthcoming. The need to regulate corporate governance is clear.

·         E.g. Among all the recommendations in the Kotak committee report, the regulatory capacity aspect stands out the most.

Role of regulators in ensuring good governance

·         Extensive monitoring and a disproportionate cost of non-compliance strike fear at the heart of all incentives to commit illegal activities.

·         These mechanisms introduce reinforcing feedback loops.

·         Complying with laws can then become personal effortless behaviour.

·         Exemplary penalties on non-compliance act as reminders and can provide a strong behavioural nudge towards better governance.

·         Robustly equipped regulatory systems can influence and nudge companies towards better behaviour.

·         Such systems have a key role to play in bringing about a meaningful shift towards a superior governance culture.

Suggestion

·         The Kotak committee report has made three important recommendations for enhancing regulatory capacity: scaling up employee strength, setting up units for data science/risk and building cross-regulator platforms for enforcement.

·         It would be appropriate to find global benchmarks on employee strength across comparable regulatory departments.

·         It will also be necessary to identify operational best practices around the world.

·         Evidence-based inputs on these aspects could contribute to better policymaking in these areas.