governance: how to deal with emerging turbulence in the governance environment

The waves of disruption in the corporate governance environment have intensified again recently and stakeholders have been alert to red flags in the organization. Unlike the ‘black box’ in airplanes that helps unearth the reality behind the crash, governance issues in the organization involve many kinks to uncover.

When financial irregularities and mismanagement occur, the spotlight is shone on the sounding board and auditors for their role in stopping such an incident or the red flag before it damages trust, then regulators are forced to take extreme measures to protect the interests of stakeholders. Certainly, the nature and complexity of the governance issues encountered would be different in the case of a sponsor-driven entity, startups, SMEs, non-corporate entities which typically have fewer regulatory and oversight requirements.

Recently, we hear noise on sensitive topics such as:

  • Embezzlement
  • Governance issues in fintech companies and major exchanges
  • The independent directors resigned citing serious shortcomings in the management of the company
  • The outcome of the Annual General Meeting was not released, which was only done when requested by SEBI
  • Insider trading issues
  • Mismanagement at NBFC

In light of the above, management must have a strategy to protect the interests of stakeholders and protect the goodwill of the organization.

Recommended areas for the Board that can help strengthen Governance and add value to the Organization

1. The Functional HOD periodically presents their department’s risks and strategies to Board members.

Such an independent dialogue will allow the HOD to share its point of view with the core group. This will help in many ways, but the basic objective of the Committee is to understand and feel if there are areas that need regular navigation and monitoring.

2. External audit of the processes and practices followed

Typically, management focuses on high risk areas to standardize procedures, periodic internal and external audits, monitoring and implementation of suggested best practices. The audit committee (which is part of the board of directors) may also consider the following suggestions in these areas:

  • Include low-risk areas with less frequency
  • Typically, the entity’s internal department oversees statutory compliance functions such as direct taxation, indirect taxation, local taxes, and employment contract compliance. An external subject matter expert may be involved to perform the full compliance check at periodic intervals.
  • Management can have more than one internal auditor and split/rotate areas between them.
  • There is a traditional audit procedure of obtaining direct confirmation of balances by the entity’s auditors from banks, customers and suppliers for period-end balances to identify any deficiencies in the accounting . Similarly, obtain feedback from the organization’s customers and suppliers and then conduct an independent review by external auditors of that feedback, which will ensure that the result is unbiased and unfiltered.

3. Frequent meetings at City Hall

Simply posting the “Employee Code of Conduct” on the entity’s website or uploading recorded videos will not help achieve the desired result, but it will only ensure compliance. Instead, live town hall meetings with a small group of HODs, executives, and a lower, cross-departmental level will allow management to have more interaction and two-way communication. This forum can also discuss work environment, cultural mismatches, sharing of criticism and whistleblower mechanism. Coaching and mentoring with the right fundamentals is the one hour need to instill the spirit of governance

4. Develop an internal framework for job rotation

Rotating key responsibilities on a periodic basis will encourage new learning and develop transferable skills among employees. This will have a much greater impact on key functional areas such as marketing, treasury and finance, business development and human resources.

5. Critics meeting for key decisions and follow-up

The organization needs a rigorous censorship board before deploying strategic decisions. These questions may include:

  • Key manager related to onboarding or termination or reappointment
  • One-off transactions with related parties
  • Robust mechanism to ensure borrowed funds are not misappropriated or embezzled
  • Appointment of a parent of KMPs/Founders in the organization with a primary role that otherwise requires independence and an unbiased perspective.

Role of the Statutory Auditors

The Eye of the Auditors certainly looks at internal financial control over financial reporting and discusses key audit matters with those charged with governance, i.e. the audit committee and the board of directors. ‘administration. Audit tools are adopted for sampling and other audit procedures that ensure there is no subjectivity or bias. Beginning in fiscal year 2021-22, there are additional reporting requirements imposed on the auditor on matters such as cash losses incurred, continued greening of loans, misappropriation of funds, etc., which will be relevant to stakeholders.

Conclusion

Sounding Board may have to take tough calls and take quick action in turbulent situations in the governance environment. It is better to communicate timely with stakeholders for more transparency and to avoid the vine. Setting the tone for top management has been a fundamental and fair approach for ages that management must adopt.

The author is partner, NA Shah Associates

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