Recent high-profile scams and governance failures have caused a shift in focus to corporate governance. This has put the modern-day CFO in the spotlight considering the important role they play in a company’s C-suite. Here is everything the finance leadership should bear in mind when it comes to corporate governance within an organisation.
Every organisation needs to have Corporate Governance policies in place. The purpose of these should be wealth creation, it’s management and subsequent sharing while balancing the interests of a business’s stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community at large. While it helps improve the company’s efficiency and transparency, its significance is more prominent in today’s age now more than ever. The financial meltdowns of Enron, Tyco, AIG, WorldCom, Xerox, Satyam and the recent corporate governance debacle at Infosys, has further emphasised the importance of corporate governance in organisations. These rather frequent high-profile scams and governance failures have caused increased concerns among stakeholders and their expectations that these policies be of international standards.
The CFO’s role in Corporate Governance
The shift in focus to corporate governance has put the modern-day CFO in the spotlight. The current Indian corporate governance framework requires a company to disclose all related party contracts, comparative metrics on manager-level pay, appoint audit and nomination committees, sign off on important documents and more. Not only has the role of a CFO undergone a radical transformation, but it has also laid emphasis on the finance leadership’s position in being an integral part of the C-suite and company-wide related issues and not just budgets or finances. With the increase in statutory compliances and corporate governance codes and practices, the need to create a globally accepted standard of reporting arose which meant that finance accountants were directly answerable to a company’s board and stakeholders. This responsibility of getting an organisation’s financial statements endorsed by the, over time, evolved into Chief Financial Officers and the important role they play in a company’s board.
Here we outline some points a CFO should bear in mind when it comes to introducing and overseeing corporate governance in an organisation.
Increase accountability through performance evaluation of board/directors
To truly make the board of directors of a company effective, they too need to be held accountable given their capacity and the role they play in an organisation’s future. This needs to be reinforced by limiting the number of directorships, the value, and skills each director brings to the table, minimum attendance required for board meetings. As a CFO who is one of the decision makers of the organisation, he/she can enforce this practice as a mandate.
Regular performance evaluation of the board members and the board committee is an efficient way of bringing in accountability for every member of the company, right from the bottom of the pyramid to the apex. This should be put in place once the key performance indicators for the company as a whole is identified and shared with the business’s shareholders at the beginning of every financial year to instill accountability within the board. India’s current corporate governance framework requires listed companies to have independent directors to account for one-third of their Board. It is imperative that only these independent directors assess the performance evaluations to avoid any biases.
Keep management and shareholding separate
It is imperative to make sure that every director who serves on the board has earned his/her position because of their own merit and not because the person is a shareholder. In many countries, company ownership and management follow a legacy succession model, i.e. the role of company director may be passed down from one generation to the next without any vetting. To avoid such circumstances, a set eligibility criterion needs to be in place to ensure that.
Technically, the term ‘governance’ refers to the managing of a company. But what most people fail to realise is that in the case of a corporate, ownership is different from the actual management of the company. Owners most often delegate the management of the company to the management team. It is vital to ensure that this team runs the company keeping the best interest of the owner and his/her company in mind and their own personal agenda.
The corporate governance regulations also require the CFO and CEO to sign off on the governance norms being met in the financial statements. It is clearly evident that the CFO has a rather important role in the organisation to play in today’s day and age as he/she leads the company as a whole to better practices that are ethically compliant and meets international standards.