Efficient Corporate Governance Framework - Essential for Success

Corporate governance refers to a necessary framework adopted by companies to safeguard the interests of customers and other stakeholders. An efficient corporate governance structure can ensure positive returns for shareholder. Moreover, with ESG increasingly being recognized as a key component of corporate governance, this ensures that the company meets its obligations toward the environment and society.

A company is a group of stakeholders coming together from diverse backgrounds to fulfill common goals. It is an amalgamation of owners, employees, partners, investors, customers, government, and most important – society.

In the highly competitive business environment today, it is important to understand the inter-relations between various stakeholders. Moreover, many companies nowadays have global presence, with business transactions across countries. In such a scenario, how does a company safeguard the interest of customers without compromising on its obligation toward other stakeholders? Which rules and regulations should it adhere to? Does it need to customize its protocol for every country? How does it stay ahead of competitors?

Corporate governance has evolved to include performance governance, and efficient competition and risk management. It helps ascertain whether the business is functioning as per legal standards and will it meet the long-term goals of stakeholders. It ensures transparency and accountability. Timely review of control systems of subsidiaries, measures to avoid conflict of interest between different stakeholders, and steps to ensure adherence to government regulations and societal standards go a long way in building credibility. Corporate governance, therefore, tracks how a company is coping with the internal and external environment and associated challenges.

Why is corporate governance key to improving performance? A strong corporate governance structure, including compliance with codes, helps a company develop a strong risk appetite. Streamlining financial and legal processes in line with rules and regulations makes it easy to spot fraudulent activities. Close monitoring of projects assists in improving performance.

Though complex to implement, if the company adheres to corporate governance codes, it creates a win-win situation for itself and its stakeholders. Adherence gives shareholders the confidence that their interests are protected, and actions taken by the company are directed toward the overall growth of the organization.

An increasing requirement under corporate governance is adoption of Environment, Social and Governance (ESG) principles. It is becoming a norm for investments by companies. ESG principles not only entail adoption of environment-friendly practices but also addressing social issues concerning labor practices, talent management, product safety and data security. Shares of ESG-compliant companies usually do well. Investment in ESG compliance more often than not renders corporate governance foolproof.

Corporate governance provides a strong framework for an organization to achieve its objectives. It encompasses every aspect of management, from operational plans and internal controls to balance sheet checks and corporate disclosure.

At Aranca, we have a well-defined process to help asset managers evaluate public companies’ compliance with corporate governance norms. The process includes data collation, sanitization, validation and analysis around the broad parameters of the corporate governance framework of a company. We also scan the details and reports of various companies incorporated in the same sector across the globe to review their adherence vis-à-vis that of peers. These reports include corporate governance report, audit report, annual reports, Pillar 3 reports, registration documents, proxy statements, 10K reports, different types of committee reports, etc.

The data points collected are a company’s general information, list of board of directors, their workload in terms of meetings attended and any other fulltime roles, executive committees, remunerations for the board and the executive committees, shareholder information, board of directors’ biographies, auditor analysis, and the company’s risk profile. Extensive research is done on these executives to establish their experience in the finance and risk domains. Thereafter, the data is sent for 100% validation by reviewers.

The client benefits from the research data collected and validated by Aranca. Asset managers use this data to make decisions.

The image below illustrates the delivery framework deployed by Aranca to assist asset managers with corporate governance-related data. This data can help companies and investors in doing a peer comparison as well as understanding a company’s viability.

Delivery Framework

A prototype of analysis conducted is given below.

We believe an effective corporate governance framework in an organization can lead to positive returns for shareholders. Hence, asset managers typically want to evaluate the efficacy of corporate governance in a company before making their investment decisions.