The Importance of Good Governance in Running a Firm

C Balagopal

I have sometimes been asked by friends to study their companies that were facing difficulties, and suggest ways of coming out of troubles. It has been found in several cases that the problems were less of management and operations and more of governance. In many SMEs, little attention is paid to governance, under the mistaken impression that governance is something that is relevant only for large companies.

It is the duty of the directors to see that the firm operates as per the governance policies set out by the board, says C Balagopal

What is governance? The word is derived from the verb ‘to govern’ which refers to ‘control, guide, regulate’. The management of a company is tasked with operational responsibilities such as manufacturing, marketing and sales, financial management, administration and so on. At the beginning of the year, a business plan is drawn up. Thereafter, each component of the management team goes about their tasks in particular areas. But is that sufficient?

Each company is defined by the vision set out by the founders which, in turn, determines the policies and strategies that will be pursued. One company may opt for the highest quality and to be content with its focus on customers willing to pay a higher price, while another may choose to make cheaper products to cater to a mass market. It is the duty of the company Directors to see that it operates according to the governance policies set out by the Board.

If the vision for the company is to be fully compliant with all rules and statutes, then it is the duty of the Board of Directors to monitor the progress of the company periodically to ensure that it is doing things in accordance with the vision. This is spelt out in clear policies that will lay out what is and what is not an acceptable way of doing things. This can apply to matters such as procuring business, dealings with business associates, dealing with people and staff, payment of taxes and other statutory dues, and other aspects of doing business.

While the operations of the company are no doubt important, the Directors will be interested in the aspects mentioned in the previous paragraph, and will seek reports at Board meetings on those aspects to be given regularly to the Board by the management. Statutory compliance is usually a non-negotiable priority. If the Board is serious about the vision and policies being followed, they will engage third party auditors to study and report on key aspects of such statutes. For example, safety and occupational hazards are an important part of statutory compliance, and will usually be reported in terms of whether permits and licences are current. If one really wants to know whether these are being observed not only in letter, but also in spirit, regular audits and mock drills conducted by independent auditors will be necessary.

Ethical dealings with business associates are another aspect that defines a company and, in fact, affects business outcomes in many ways. Paying bills only after several reminders has become a standard practice of Indian businesses. In Japan, however, it is an insult to remind someone about a bill falling due in a few days! Repeated late payment obviously is not a viable business strategy. Taking refuge behind arcane contract conditions is another favourite business tactic.

In dealing with employees, businesses can either stick to the letter of the rule, or can be flexible to allow for an unusual situation. Displaying a humane approach will not adversely affect the company, but will also turn into a huge asset. The converse of this is that all dealings with employees affecting their service conditions and promotions should be rule-based and transparent. If this is done, people will tend to accept decisions more readily.

The importance of rule-based governance covering the interface between the company and its employees, customers, government and regulators, bankers and the public at large, is most important in the case of wholly privately-owned companies. Successful family-run businesses were started by entrepreneurs who acted in a way that made every employee think it was their company and that made the government respect it. A good set of governance principles and guidelines will help take the company along the course charted out by its founders.

You will then end up building a company that not only makes money, but becomes a responsible corporate citizen, and a wonderful place to work in.