Good corporate governance is the engine of social development and economic progress for any nation. It is an essential component of healthy public financial markets. Corporate governance is the interaction between various participants (shareholders, board of directors, and company’s management) in steering the performance and destiny of an enterprise.
There is a sufficient body of research-based articles and reports that lay out the issues in modern corporate governance. These issues range from oversight risk to other risks to the role / effectiveness / independence of the boards, to executive compensation to Dive-In (diversity and inclusion) issues to emerging tech risks to climate actions impact.
Yet, many boards still are stuck with the profound question: What is the role and impact of the board on corporate governance? Simply because the concept of for-financial-profit enterprises has survived for centuries now. Those with lower standards may have collapsed. Like it or not, progress in corporate governance standards has been slow. The financial sector, especially the banks have fared better in getting relevant and quicker changes done.
Much of these have been pushed as a necessity by various crises and scandals in the finance world. It is as if every new trouble brings a newer thinking to add to the corporate governance norms. That is also a good sign of an agile regulatory framework, in its ability to constantly upgrade its rules and regulations, to keep pace in the VUCA environment we operate in. But not fast enough.
Future of corporate governance
Corporate governance is ripe for disruption-for-positivity for its own betterment. Markets, investors, governments and nations – all want to have a better system of corporate governance. But yet, there seems some inertia that makes the status-quoism pronounced, except for some attempts across fewer markets including in India. India is clearly a global leader in innovating for digital public-good. Can we leverage such a tech-led enablement work for corporate governance initiatives?
Certainly so. The responsibility that the stakeholders are feeling as pressure towards betterment will have to be steered to peg the purpose and function of boards. In this journey, technology would become an enabler and a friend of the boards. But the boards also will have an obligation in ensuring that the digital technologies used by the enterprises are not misused. Issues and worries about cyber risks, cyber security breaches, data privacy, consumer protection, management overreach etc continue.
Risk management is also an oversight duty of the boards. It is no longer simply a business or operational responsibility of the executive management. To enable that they perform their role well, the boards will have to balance technology-enabled data usage, information availability and people-centricity. Many cynics have been speculating about the end of enterprises. Critics have been speculating on society’s and more critically regulators’ ability in improving corporate governance. But all is not lost. Technology and its emerging use-cases of using them in reimagining a better corporate governance.
In his book Pawns and Potentates, Jay Lorsch articulated that boards of directors often have insufficient information to perform their duties. Some don’t even invest the time necessary to provide effective oversight of management activities. While many demonstrate reluctance to distinguish between oversight and hands-on management. In the Indian market, one does observe many of the board members wanting to have their role and pride as a director, but not willing to spend time and energy in their duties, is a concern. Of course, the worries about cozy boards and cozier material beneficial arrangements, nepotism, etc still exist.
Comply or explain
This is a common regulatory approach in the UK, Germany, and the Netherlands. This compels the enterprises to comply with all its regulations on a binary basis (either it’s compiled or it has not, with no provision of any shades of doubt in between). In absence of such a compliance, it forces the entities to explain why they missed it, within a designated timeframe. This approach brings transparency in timely disclosures.
Data and digital
Newer tech-led processes would allow for granular presentation of financial and audit reporting, and even auditing will evolve with technology. Usage of distributed ledger technology would enable enterprises to use and offer real-time data on company financials and other data points. Enterprises could use smart contracts that would allow for better governance. Technology could provide for better frameworks to govern enterprises – be it data protection, contract security, real time disclosures and access to significant corporate information.
To segregate any doubt from the truth, credible and verifiable data will be the biggest enabler. Data is the biggest cause of both the good and the bad. Data governance will have to be the centre of focus while using technology towards positive corporate governance.
The usage of dependable and credible data will influence better engagement for the Boards. For example, compliance reporting can be simplified to even real-time updates for the Boards to measure. Financial data can also be available in real-time for the board committees to use for their independent discussions, away from the management personnel. Tracking company news on media and social media can be automated and displayed in such Board dash-board systems. It can showcase any lapses or deviations using automated alerts.
According to Yermack (2017) and Lafarre (2018), blockchain has potential to offer efficient solutions to problems that affect the current corporate governance systems:
- Increased transparency of ownership and ownership changes
- Efficient and fair shareholder meetings
- Real-time accounting
Each of these affect the balance of power and ability to decide amongst the Boards, regulators, investors, shareholders – especially the non-institutional. Digital would also allow for regulators to have real-time supervision of entities and markets to proactively solve for any systemic issues.
From fiduciary to advisory
Currently, our regulations steer the boards towards fiduciary roles. As directors, they are expected to be with the shareholders for the protection of their rights. Currently, most of the board members are concerned with compliance with regulatory and accounting tasks laid out by the rules. At most companies, fiduciary duty is primarily undertaken by ensuring compliance with accounting standards and regulatory requirements. With emerging technologies such as AI, big data and blockchain, much of those roles can be done by the machines and algorithms. So, what will the boards be expected to do?
This is where the future role of boards could become that of advisors. Each of the regulators have to put an effective plan to steer this fiduciary to advisory role change, without Boards being involved in day to day or executive roles.
Role in the future
With such technology led possibilities, corporate governance has the chance to be democratised, and more effective for all the stakeholders. Shareholders would get real-time information access and may be able to participate in more frequent decision making that regulations would permit. There would be lesser information-arbitrage between different classes of shareholders.
A robust corporate governance framework is like a mirror on the wall. But humans have proven time and again to be vain and delusional too. Regulations and technology have to solve for that basic human flaw. Corporate Governance, like democracy, will continue to be work in progress, and won’t be steady end-state.
(Dr Srinath Sridharan is an author, policy researcher and corporate advisor.)