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Blog > Accountability Issues in Corporate Governance

Accountability Issues in Corporate Governance

VComply Editorial Team
March 30, 2024
2 minutes

The importance of good corporate governance for an organization’s success has been a topic discussed across. However, even though organizations keep in mind the principles, the different models and all the aspects of good governance, there is always scope for error and that is why issues in corporate governance are in abundance. Especially accountability issues.

What is Corporate Governance?

Corporate refers to the system by which a organization is governed. It comprises of best practices that guides the conduct of employees in an organization.

By now, we know how important accountability and transparency is in corporate governance. Let us look at some of the steps you could take against potential issues that you may have to face.

Choosing the right board

It is now well established that the board in any corporation plays a pivotal role in its governance, which is why care should be taken to not put undeserving, inexperienced people who are incapable of handling crucial situations and forming suitable solutions. So that everyone’s point of view is represented in the board, it is important to have a diverse group of people in the group with a healthy mix of ethnicities and men and women. Besides the board managing everything, it is important that the seriousness of the entire corporate governance business is ingrained in the corporate culture. Complying on paper is not enough; there should be visible, tangible compliance and subsequent results. Board appointments should be done by voting only and on the basis of talent and experience and not because of family contacts or influence. This will make sure that the board comprises of people who are dedicated towards working for the company’s cause and not just there for the sake of it.

Evaluation of Directors

The board also needs to be evaluated on the basis of their performance. The performance of directors as a group as well as individual performance need to be considered by elaborating on both qualitative aspects and quantitative aspects how they achieve objectives, how they handle ethical issues. Usually, these evaluations are called to be made public such that the results actually have an impact on the directors. However, such evaluations can become sensitive in nature and full public disclosure may turn out to negative impact on the organization.

Handling of Independent Directors

Independent directors are accused for maintaining a passive stand regarding the board’s decisions. However, in cases where these directors have protested against promoter decisions, they have been removed for non compliance with the promoter and this is by law as it is stated that an independent director can be easily removed by promoters or majority shareholders. This inherent conflict has a direct impact on independence. Therefore, to make sure that directors are not just simply removed from the board, there needs to be a better evaluation system in place to justify the removal and the decision of the majority should be taken into account.

Accountability towards Stakeholders

Directors have duties not only towards the corporation that they head and its stakeholders but also towards its employees, the community and the environment’s protection. These general duties need to be carried out by all directors, however the independent ones come across as complacent. This may be due to the lack of actual implementation. Therefore, to further propagate accountability, the entire board must be mandated to be present for all meetings with stakeholders to incite healthy camaraderie.

Control in the hands of the Founder

In some countries, the founder’s identity is often merged with the company’s identity in the sense that they identify as one and the same. The founder has immense control over the working of the company and can make or break any aspect of governance. There is a lack of succession planning and founders keep exercising their power to influence crucial decisions regarding the company. It is important that the founders chalk out a succession plan and implement it.

Managing Risks

A risk management policy has always been imperative and has gained more importance over the years, especially in today’s world where big businesses are under the scrutiny of the media and other competitors. A proper risk management strategy needs to be chalked out and inculcated in the day to day workings of the company. The independent directors are mandated to assess the risk management systems of the company.

‍Data Protection and Security

Today, everything is digitalized, and as much as it has an immense number of advantages, it also poses a great risk to the privacy of data. The board must be familiar with at least the basics of cyber security to protect the company against a potential data scandal. The board must invest a reasonable amount of time and money in order ensure the goal of data protection is achieved.

Corporate Social Responsibility and the Board

Companies that meet the specific criteria/thresholds are required to constitute a CSR committee from within the board. This committee goes on to frame a CSR policy. Companies are required to spend at least 2% of the average net profits of last three financial years on CSR activities. In case the expenditure is not carried out, proper justification needs to be provided. CSR is important and CSR projects should be managed by board with as much interest and vigor as any other business project of the company.

In Conclusion

A good corporate governance system ensures transparency, fairness, and accountability. VComply offers a complete GRC management solution to help you streamline everyday compliance processes with a centrally managed, cloud-hosted system.