SPEECH ON CORPORATE GOVERNANCE AND THE ROLE OF HR

A very good morning to one and all present here. I today thank the authorities of NLU for
giving me this opportunity of sharing my views, amongst all the dignitaries on the dice,
my fellow friends and the talented law professional cum students present here, regarding
a much debated topic CG and the role of HR.

The collapse of Enron, WorldCom, Global Crossings, and Tyco in USA; Ahold,
Vivendi, and Mayflower in Europe; Harris Scarfe, HIH Insurance, and OneTel, in
Australia, are all now part of history. Histories that may be forgotten, but are
pregnant with issues which have to be addressed to ensure that such incidences
do not occur in the future. Be it Enron or WorldCom, or any other of these
organizations; they were not only profitable entities of yesteryears, which made
shareholders rich and stake holders happy, but were also often epitomized
(before their collapse, that is) for innovative business methods and trend
setting practices. The question that has haunted the public in general is that, how
come such companies came down like a house of cards, after building operations
and profits of seemingly impenetrable scale and magnitude. Can organizations take
steps to ensure that such catastrophes do not occur? And what would be the role
that HR would play in drawing-up such “failure prevention” strategies?

Deeply interwoven with the process of corporate failure, is the process of

corporate governance. In fact, a study pointed out that organizations which had
strong Governance processes in place not only hedged themselves against such
(collapse kind) catastrophes, but also enjoyed better valuations (market
capitalization). So the question of corporate failure and HR can be briefly
recast as –what is the role of HR in the Corporate Governance Process.

For this, let us first define as to what Corporate Governance is, its need, importance
and other aspects. Like many other management concepts, Corporate Governance
has a number of definitions and one that is often used is that of CII –“(corporate
governance) deals with laws, procedures, practices and implicit rules that determine
a company’s ability to take managerial decisions vis-à-vis its claimants—in
particular, its shareholders, creditors, the State and employees”.

According to Sir Adrian Cadbury, head of the Committee on the

Financial Aspects of Corporate Governance in the United Kingdom:
“Corporate governance is the system by which companies are directed
and controlled”

Global Genesis for Corporate governance

1) The Cadbury Report in UK (1992) became a pioneering reference code for Stock

Exchanges in UK and adopted by many countries.

 2) General Motors Board of Director’s Guideline in USA and Dey Report in Canada.

3) King’s Committee (South Africa)

4) In 2002, Sarbanes-Oxley Act: This Act is considered to be one of the most significant

changes to Federal Securities Laws in US. SOX specifically extend protection to

“whistleblowers”

5) The OECD Principles of Corporate Governance

Indian Genesis

In India, the Companies Act, 1956 was the principal legislation providing the formal structure of

corporate governance. Apart from the Companies Act, other notable enactments are -- MRTP

Act, 1969, FERA, 1973, FEMA, 1999, I(D&R) Act, 1951 have a bearing on the corporate

governance. Till May, 1992, the office of the Controller of Capital issues was the regulating

authority for the capital market; thereafter SEBI has assumed the primary role.

After the report of Cadbury Committee (1992) in UK; CII published a Desirable Code of Corporate

Governance, which was voluntarily adopted by some companies. After that several committees

have been formulated like:

• The Kumar Mangalam Birla Committee (2000):It was advised that a new clause 49 be

incorporated in the listing agreement.

• The Naresh Chandra Committee (2002)

• The Narayan Murthy Committee (2003)

Let’s now understand as to how does governance matter for growth and
development

The literature has identified several channels through which corporate

governance affects growth and development:
• The first is the increased access to external financing by firms. This
in turn can
lead to larger investment, higher growth, and greater employment
creation.

• The second channel is a lowering of the cost of capital and

associated higher
firm valuation. This makes more investments attractive to investors,
also leading
to growth and more employment.

• Better operational performance through better allocation of

resources and better management. This creates wealth more
generally.

• Good corporate governance can be associated with a reduced risk of

financial crises. This is particularly important, as financial crises can
have large
economic and social costs and it also promotes transparency as it
extends beyond corporate laws

• Better relationships with all stakeholders.

• Capital market – better practices protect the investors and ultimately contribute to the strength
and growth of the capital market.

• Self regulatory code

• It ensure better resource allocation and management raising the return to capital.
The return on assets (ROA) is about twice as high in the countries with the highest level
of equity rights protection as in countries with the lowest protection

Thus the attention that is being delivered to the subject is much needed and though
through corporate scams the government is now paying much attention to the subject that
can be viewed through Some of the mechanism that have been layed to overcome this
problem
1) Whistle Blower Policy As per the voluntary requirement of listing
agreement
2) As per the regulation 12 of the insider regulation provide that all listed
companies and organisations associated with securities market shall
a) Frame code of internal procedure
 b) Abide by the code of corporate disclosure practice
3) Disclosures to be made to the stock exchange as per regulation 13 of the
insider regulation, Chinese Wall
4) Secretarial Standards prescribed by the ICSI etc
5) The incorporation of clause 49 in the listing agreement that is required to be
complied by all the listed companies
6) Secretarial audit being implemented though through a voluntary guideline, 2% of
the average net profit to be used by the business organizations for the purpose of
CSR activities as per the proposed company law bill

But all the efforts can be successful in totality if the management has a clear intention to
implement them. And through all these efforts of governance the ultimate goal of
achieving corporate governance can be achieved.

The question therefore is, can HR play a role in all of this? The answer is obviously
yes. Across the HR value chain, from recruitment to learning & development to
reward management to career & succession planning, HR can play a significant role.
By conducting appropriate tests and background checks (reference checks), the
organization can ensure that it recruits people who are in sync with the value
systems professed and practiced by the organization.

This is perhaps the most critical aspect of the whole process, since, as in the words
of Jim Collins, it will be necessary for the organization to first determine who it wants
to be on the bus.

So, if the destination of the bus is, conduct of business ethically (apart from profit
and other objectives), it should ensure that it has screened the right people to get on
to the bus. The second aspect is, what elements in the organization are constantly
reinforced – in terms of training and development. Many leading organizations
known for their value systems, such as Lewis Strauss, spend considerable amount
of monies and energies in developing, communicating and ensuring internalization of
the organizational values. The third and perhaps most important element is the
reward and recognition mechanism.

People will behave and perform those acts which are eventually recognized and
rewarded - if the organization constantly places the goals/ends over the means, ie.
rewards the ends (achievements) irrespective of the means adopted, then
people in the organization, as a whole, will develop a tendency to throw caution to
the winds in reaching their goals. And, most organizations which have failed are
those which favored “quarter performances under any circumstances” over long term
survival. And when an organization begins to reward and recognize those who are
as interested in “how a goal is achieved” as the goal itself, it will begin to develop
leaders who will carry them this value system as they head to the CEO’s post. In
today’s world where the survival of organizations is important not just to the
employees but the nation as a whole (remember all the share holders who lost their
shirts when Enron went under), HR will have to play an active role in ensuring that
they build an ethical enterprise.

Today all of us focus on profit making and we derive all the means for getting that goal
no matter what the way may be, but we at Shree follow the triple bottom line theory in
which our first priority is people, I today say this not for the sake of saying but friends I
can prove it, How ??? see, by satisfying all the needs of our manpower they feel happy
and motivated and work for the benefit of the organization leaving their own personal
benefits as there is company to think for them, thus the company gains ultimately.

The second priority is being given to planet that is by not polluting, spreading A
Forestation, contributing to the well being of the local people of the society where the
company operates by organizing programmes and camps relating to health and well being
Thus by contributing to the society were a company operates, the society too extends a
helping hand to the company in times of need, thus again company is benefited.

To prove it further, as the company today complies with all the rules and regulations, this
can be witnessed through the various awards and felicitations received by the company
this thus encourages the government to further cooperate with the company in times of
need, thus it is a proved concept at Shree that a organization can prosper only if its
stakeholders are satisfied rather than just focusing on profit and this drives us to fulfilling
the requirement of CG. Thus if all HRD departments carry such philosophies then this
problem can be easily resolved

So it is just how you see and perceive things in life.