Perspectives from ISB

A family business has many challenges as it grows and corporate governance is often pushed to the back burner as more urgent, not necessarily important, day to day activities and expansion concerns take up the owner managers’ time.

The board is the most significant instrument of corporate governance. Once in place, it would improve the quality of decision making process, resulting in better decisions with long term benefits for the company. It ensures continuity, economic growth, maintains investors’ confidence, results in lower cost of capital, minimizes wastages, corruption, risks and mismanagement.

Historically, anecdotal evidence points to the fact that a board goes through a process of evolution as the organisation grows that has a direct impact on the growth, profitability and sustainability of an organisation. The starting point as well as the speed of evolution is largely dependent on the progressive mind set of the board and the owners / promoters.

Each stage of evolution brings with it exponentially improved levels of governance. As this also means higher levels of participation from more skilled and experienced management that is also more progressive, the company begins to see rapid growth and improving shareholder value and wealth. There are three broad stages, not necessarily followed in the same sequence in practice.

Stage One: Rubber Stamp Board or Nodder’s Club or Consent Board: The boards merely rubber stamped every proposal or decision of the promoter/ managing director. The company performed, stakeholders were happy and the boards only nodded. This was the type of board that existed in most companies, big or small, during the License Raj and in the pre liberalisation period. They were generally successful as they had resourceful Promoters who could get the necessary licenses and permits from powers that be.

Two: Functional Board: The board would be conscious of the impact of its decisions on enterprise performance and their competitive positioning and thus focussed on its “work”.  This type of board’s strengths were capitalising on the expertise of its members, better comprehension of how the organisation achieves or can achieve its goals and its ability to harmoniously connect operational issues to strategic milestones.

Three: Strategic Board: The strategic board plays a proactive role and finds a balance in terms of fulfilling of fiduciary responsibilities, overseeing the operational realities and crafting a strategic direction both in the medium and long term.

Evolution from the first to the second stage is the most vital and challenging even today for the Indian industry. However, for rapid inclusive growth where the boundaries expand to global horizons the evolution from the second to the third stage becomes relevant. Independent directors with diverse backgrounds, expertise, and professional experience are central to strategic governance and growth of the firm, whether small, medium or large.

Source: Gupta, Nabankur, ISBInsight, Volume 4, Issue 4, pp32-34

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