Time to Pause – Rethink – Restart Corporate Governance Practices

By CS Anisha Raheja

Introduction

The pandemic of Coronavirus (Covid-19) has affected, directly or indirectly, the lives and operations of human beings and entities alike. On one hand, Covid-19 has endangered the life and health of people; on the other hand, it has given rise to unprecedented challenges for business leaders worldwide. The restrictions imposed by governments of many countries, for curbing the spread of the Covid-19, has confronted the business leaders with significant challenges for carrying out the business activities. At the same time, the landscape of corporate governance has evolved with various changes in rules and regulations or relaxations introduced on account of the Covid-19 pandemic. The effects of the Covid-19 on governance would be different in countries across the globe.

In these days, as significant events are more often being classified as ‘Pre-Covid’ and ‘Post-Covid’, the same applies to events in corporate governance.

Wikipedia defines Corporate Governance as the collection of mechanisms, processes and relations used by various parties to control and to operate a corporation. Corporate governance includes processes through which corporations’ objectives are set and pursued in the context of the social, regulatory and market environment. These include monitoring the actions, policies, practices and decisions of corporations, their agents and affected stakeholders. Corporate governance practices can be seen as attempts to align the interests of stakeholders.

An organization cannot function in isolation. An organization operates in an environment which consist of employees and directors which are referred to as internal stakeholders. Customers, suppliers, vendors, regulators, auditors, shareholders can be referred to as external stakeholders. The internal stakeholders are instrumental in serving customers/ clients and ensuring that the organization objectives are met while the external stakeholders provide/ buy goods & services from the organization; the shareholders invest their money in the organization etc. The success of any organization depends upon co-ordination, co-operation, trust and transparency between the organization and internal/ external stakeholders. To maintain this transparency and bring about credibility to the transactions undertaken by the organizations, regulators require certain reporting compliances.

In India, the Ministry of Corporate Affairs (‘MCA’), the Central Board of Direct Taxes (‘CBDT’), Central Board of Indirect Taxes and Customs (‘CBIC’), Director General of Foreign Trade (‘DGFT’), Reserve Bank of India (‘RBI’), Securities and Exchange Board of India (‘SEBI’) amongst many others can be reasonably called as bodies which govern the functioning of an organization in India. Depending upon the nature of their business, organizations need to adhere to rules and regulations rolled out by the various regulators under which they are entitled to operate.

Several relaxations were extended to organization by regulatory authorities to ease their compliance burden – for instance, the MCA provided for an increased the interval between two board meetings, extension of submission of declaration of commencement of business, waiver of additional filing fees, permission to Board of Directors to approve financial statements via video conferencing etc. The CBDT extended the due dates for submission of Income Tax returns for Assessment Year 2020 – 2021, reduction in withholding tax rates, extension of timeline for linking Permanent Account Number (PAN) with Aadhaar amongst others.

However, even though there was an ease of compliances, the Board of Directors/ Management was left to juggle multiple tasks together – ensuring continuity of business operations, initiating new organizational policies to accommodate the changing work environment, effective communication to internal and external stakeholders, devising a robust IT infrastructure to minimize the possibility to errors and downtime amongst many others. Whilst doing these, the business had to conduct itself in the light of the best corporate governance practices and the board of directors/ management was entrusted with the responsibility to conform to this.

Here, we identify a few corporate governance practices which must be adopted by an organization in the light of the regulatory framework to ensure a sustainable future.

1. Resetting Organizational Policies:

The board of directors must take a review of the existing organizational policies and evaluate these in line with the current scenario. The policies which are no longer relevant should be discontinued and new policies should be introduced. The management should come up with a framework which would be an organizations response to an unprecedented event. Unimportant functions should be decentralized and employees should be trained to enable them to be equipped in dealing with crises.

2. Robust Information Technology (IT) infrastructure:

The ‘work from home’ culture is here to stay even in the post pandemic world. Several MNC’s worldwide have announced that they would be adopting the hybrid working model. This requires organizations to have in place a robust IT infrastructure and also an IT policy. The pandemic has already revealed the role of information technology in day today functioning of an organization. The organizations IT policy must define a company’s protocol for data sharing, maintaining confidentiality of data, employee authorizations and access to sensitive and confidential information etc. Not only are organizations’ deliverables to its customers in an online mode today, but also financial data or other reporting compliances to the income tax department or the MCA or any other authority and reporting compliances are to be made online.

Thus, considering the impact of technology of the working of an organization, it is recommended to implement strict and appropriate IT protocols.

3. Effectively Communicate:

The board of directors should effectively communicate to employees, vendors, creditors, debtors, regulators etc. about the deviations in the organizational policies which may have an impact on their transactions.

Commercial contracts should be reviewed to ensure inclusion of clauses such as a force majeure clause which may result in impossibility of performance and adverse events which may require re-negotiation of the contracts. Incase vendor services are no longer required; the same should be discontinued with a formal intimation to them.

Employee communication is utmost crucial and HR policies should be appropriately be communicated and their concerns be suitably addressed.

4. Working Capital Management:

Liquidity is essential to any organization. In order to be operate smoothly, an organization should have available at least two months working capital. Debtors & creditors positions are required to be reconciled, cash credit and overdraft limits are required to be evaluated and re-negotiated with banks if required.

Working Capital is very crucial and incase of any inconsistency or lapse in the working capital management, the organization functioning will be severely hampered.

5. Corporate Social Responsibility:

The pandemic has made it imperatively clear that as much as an organization is responsible in achieving its business objectives, it has a moral and social responsibility to serve the society as well. The board of directors/ management should make a concentrated effort to devise a plan of action to undertake social activities on a regular basis. Employee participation and engagement in such activities should be encouraged.

Conclusion

Even though all the above factors are merely indicators of good corporate governance, an organization would have to review these from the point of view of its business objective and sector which it caters to. The board of directors/ management should exercise reasonable skill and diligence while incorporating corporate governance policies in their organizational structure. The Covid pandemic has given a completely fresh perspective to corporate governance which obligated organizations to pause, reset and reinvent their structures and policies to drive them to a sustainable future.

To conclude, Jonathan Swift has very rightly quoted – “vision is the art of seeing what is invisible to others”. Similarly, the board of directors/ management of an organization should build an organization with a vision which holds within itself the seeds of sustainability.