Corporate Governance and Value-Based Organisations

Lakhs of small shareholders own a listed company, but a few managers run it. The owners cannot watch every decision. Something must keep the managers working for the company rather than for themselves.

A fuller version: corporate governance is the system of rules, practices and processes by which a company is directed and controlled so that stakeholder interests are balanced.

Two theories start from opposite views of the manager.

An illustration. A CEO's bonus depends only on this year's profit. She can lift profit by ₹5 crore by putting off machine maintenance, though the delay will cost ₹15 crore in repairs later. Agency theory predicts that some managers will make that trade. Linking pay to performance over several years, and an audit committee that asks about maintenance, make it less attractive.

The OECD Principles of Corporate Governance, first issued in 1999, are international guidelines. They cover shareholder rights, equitable treatment of shareholders, transparency and disclosure, the role of stakeholders, and the responsibilities of the board.

Don't confuse governance with management. Management runs the business day to day. Governance decides who directs the managers, and checks that they serve the company. Also keep the roles straight: shareholders are the principals; managers are the agents.

Where it breaks. Heavy monitoring costs money, and good managers may read it as distrust. Pure stewardship can be naive when pay and power invite abuse. In many Indian companies a promoter family holds control, so the sharper conflict is often between controlling and minority shareholders, not between owners and hired managers.

For exams. Know the Cadbury definition, which party is the principal and which the agent, how agency theory differs from stewardship theory, and the areas the OECD Principles cover.

Go deeper for practitioners

Agency costs. Michael Jensen and William Meckling (1976) named the costs of the owner–manager split. They include the cost of monitoring managers, and the value lost when managers still act for themselves.

In India. The Companies Act, 2013 requires independent directors and audit committees for specified classes of companies. Listed companies must also follow SEBI's Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015, which replaced Clause 49 of the listing agreement.

A case. In January 2009, the chairman of Satyam Computer Services admitted that the company's accounts had been falsified for years. The board, the auditors and the investors had all relied on figures that were not true. If you sat on a board today, what would you ask for, beyond the audited accounts, to be sure the cash really exists?

Two firms have the same written rule on gifts from suppliers. In one, staff quietly accept them. In the other, they hand them back without being asked. The rulebook is the same; the shared values are not.

Its main features:

• Values first. Ethical values shape culture, leadership and strategy.
• Profit with purpose. Contribution to society ranks alongside profit, not after it.
• Vision at the top. The vision statement, the long-term aspirational direction, sits at the top of its hierarchy.
• Trust as the core success factor, built through consistent ethical conduct and shared values.

An illustration. An auto-parts firm in Pune states its vision as "safe vehicles for every Indian family". One core value follows: safety before schedule. In practice, any line worker may stop the line on finding a defect, and is thanked for it, even when an order is late. The vision is now visible in a daily decision.

Why trust matters. When staff, suppliers and customers trust a firm, it needs fewer checks, contracts are simpler, and people raise problems early. Trust builds slowly through consistent conduct and is lost quickly through one visible breach.

Don't confuse vision with mission. A vision says where the organisation wants to be in the long run. A mission says what it does now, for whom and how. Nor confuse stated values with lived values: values on a wall poster count only if decisions follow them.

Where it breaks. Values that leaders do not live by breed cynicism faster than having no values at all. Values can also clash with short-term profit in a downturn, which is when they are really tested. And they are hard to measure, so they slip off the agenda.

In practice. Hire and promote people partly on values, have leaders model them, and review hard decisions against them. A commonly cited Indian example is the Tata group, where charitable trusts hold most of the shares of the parent company, Tata Sons.

For exams. Vision is at the top of a VBO's hierarchy, and trust is its core success factor.

Values set the vision; conduct earns the trust.