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Importance of corporate governance in light of frauds

As and when a new corporate fraud becomes 'Breaking News' the voices start again about the importance of corporate governance especially within family businesses.

Sonu Bhasin   New Delhi     Last Updated: March 9, 2018  | 19:00 IST
Importance of corporate governance in light of frauds

As and when a new corporate fraud becomes 'Breaking News' the voices start again about the importance of corporate governance especially within family businesses. After the CBI inquiry began into the (mis)affairs of Nirav Modi companies, the spotlight fell on the role of professionals and other key members of the management. It was found that the directors nominated in Nirav Modi's companies were not even qualified people. Some were clerks in the company while others were accountants.

Unfortunately, Nirav Modi is not a lone case where the directors are mere names on the paper. During my consultations with family business owners, their distrust for outsiders on their boards comes across very clearly. While it would be ideal for all businesses to have appropriate boards with qualified directors, it is also a reality that this is not going to happen overnight. However, as businesses grow larger and have increased number of shareholders, corporate governance cannot be wished away. What is a pragmatic way to solve this problem is a question that is often asked to me.

The reluctance of business owners to involve 'outsiders' in their business is palpable. Some of them don't want to give up the control they wield over their own business by having to explain their actions to the board members. I look at Advisory Boards for businesses as a good way to initiate the process of building governance into the management structure of a family business. The Advisory Board can help the business owner to start feeling comfortable with an external group of experts giving advice and providing information for the business. The advisory board is not a statutory requirement mandated by the regulator; instead it is a voluntary group put together by the business owner. Thus, there exists flexibility in the composition and the role of the advisory board. In my opinion, an advisory board can be seen as a feeder group for a board of directors as the presence of qualified individuals in the advisory board will give the business owner the opportunity to observe the contributions of the members and the extent of their commitment to the business.

One key difference between a board of directors and an advisory board is the fact that the latter is seen to guide the business. The board of directors, on the other hand, is expected to govern the business. Advisory boards do not have any legal decision-making authority, but are expected to help in operational decision making by the business owner. Typically, an advisory board has, as its members, individuals who have the right business experience. The additional benefit for the business owner is that an advisory board promotes the notion of governance within the business.

Since the members of the advisory board are experts in their respective fields, it is easy for them to collaborate with the business owners to strategise for the future of the business as well as work on the operationalising these strategies. The key purpose of the advisory board is to expand the business's sphere of trust and to provide a broader range of knowledge to guide the businesses on its path of success. Smart business owners understand the importance of the advisory board and view the members as an opportunity to use the expertise that their business may otherwise not have.

Among Indian business houses it is the ones that have grown and now are global conglomerates that have advisory boards. They are usually called the Group Executive Council. The Tata group has it as does the Mahindra group. The DHFL group put together its own Group Executive Council once it grew to a certain size. These business groups set good examples for the smaller ones. However, the smaller businesses find it difficult to get over their apprehensions. This is a regretful situation. It is they who need the benefit of a group council much more than the bigger businesses.

The bigger businesses have their own challenges of growth, but it is the smaller businesses, with a hunger to grow bigger, that really do need the external perspective. They may find it sub-optimal to have professional experts as full-time employees; the professional, too, may not want to be employees of smaller businesses! An advisory board that convenes once a month or once a quarter meets the requirement of the business owner as well as the professional.

The biggest advantage of an advisory board, to my mind, remains that it is the first step that a business owner takes to proclaim internally and externally that governance is strong on his mind.

(The writer is the author of The Inheritors - Stories of Entrepreneurship and Success)

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