View from Helm: Corporate Governance Through HR Prism

Introduction

Recent incidents of conflicts of interest and values, negligence, underperformance and alleged connivance leading to fraud has put corporate governance by companies in India in focus. Such transgressions destroy considerable shareholder value in the affected companies and the companies also incur substantial legal penalties. Internally too the companies stand to lose time, effort and energy to investigate the entire fiasco, pinpoint wrongdoers, identify process and procedure lacunae, dish out punishments, get replacements, redraft policies, bring in new leadership and so on, in addition to indulge in brand rebuilding exercises to mitigate reputational damages. The company’s stock prices would have taken a hit and sales and profits would have also plummeted affecting all the stakeholders especially the employees who are left wondering as to what and how things went wrong. More often than not, it would be high-level functionaries who would have caused the damage and that knowledge is traumatic for those honest employees who are involved in the ground level, core business area of the company, quite insulated from governance issues.

The increased public concern about high profile cases prompted India to put in place one of the most rigorous corporate governance frameworks in the world. The Companies Act (2013), brought in new provisions related to corporate governance including composition of the board, functioning of independent directors, enhancing board responsibilities on financial reporting and corporate social responsibility. Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI, 2015), too laid down provisions for enhancing transparency in transactions of a company. Additional recommendations were also made by the Kotak Committee with the objective of further improving corporate governance in listed companies (Kotak, 2017).

Current Scenario

It is often stated that the actual problem in India is that most companies engage in symbolic governance to adhere to the mandated provisions. The gripe is that boards in many cases seem diligent but they essentially carryout superficial exercises by not facing the real issues related to corporate governance. It is often concluded that exhaustive listing of provisions for transparency and good corporate governance to ensure sustainable development for the benefit of all stakeholders, is not having the desired impact, across the spectrum. Many quarters feel that all laws and laid down provisions would be inadequate until the board members face personal consequences for their failings. However, there are significant penalties under the Companies Act and SEBI (Listing Obligations and Disclosure Requirements) Regulations, to ensure compliance with mandatory corporate governance provisions, which do not seem to have ensured the compliance of the laid down provisions in letter and spirit, by some cases.

Notwithstanding the highly publicised digressions, it would be incorrect to presume that the corporate governance framework is not being followed largely. The few glaring cases of boards having failed in their responsibilities do point to gaps in the adherence to laid down provisions. However, the well-defined corporate governance framework does seem to have had considerable success in ensuring compliance especially in promoter driven companies. The recent trend of corporate governance issues in companies with dispersed shareholding on the other hand gives indication of CEOs having usurped the controlling role in their boards. It is evident that the independent directors have fallen in line and have remained as mute witnesses or at times acquiesced to help the CEO to take wrong decisions despite robust legal provisions in both Company Law and SEBI regulations, giving away the influence the CEOs have in selection of the independent directors.

Role of the Board and the Leadership

Essentially, the board is entrusted with the responsibility to practice good governance, which includes working towards developing a healthy corporate culture especially in difficult times and while handling crises. A healthy corporate culture goes a long way in protecting the organisation’s future and thereby the interest of all the stakeholders from employees to shareholders and vendors. By selecting and positioning key management functionaries especially the CEO, who are aligned and who would fit well into the corporate culture and behaviour, the board can pave way for the organisation’s sustained growth. Hence, to keep all dealing above board and adhere to high standards of corporate governance, there is a compelling need to cultivate and sustain an all-pervading organisational culture built on systems, norms and values in organisations. To ensure adherence to ethical organisational behaviour, in addition to lay down ethical policies, organisations may be tempted to create structures for compliance, monitoring, verification and prevention. However, the usefulness of such ethical compliance mechanisms may be deliberated upon before implementation since such measures may have a detrimental effect on business agility, and proactive and risk-taking behaviour in the company.

Corporate behaviour is strongly influenced by the organisational culture which determines how individuals perform in an organisation from the board to the shop floor. The role of top management in the organisational culture is vital as it acts as a role model for the employees and it can also directly influence the behaviour and culture to improve not only corporate governance but also organisational performance. Internally, the top management should play a critical role in fostering the desirable organisational culture and influence the organisation’s intolerance to wrong doings.

The role of top leadership in propagating and nurturing the organisational culture is axiomatic. The CEO has to be seen to be fully aligned to the organisational culture and should ‘walk the talk’. At the same time, the perils of deviating from the laid down behaviour and culture must also be clearly enunciated and known across the organisation. The constituents of the organisation and other stakeholders would invariably look up to the top management to follow the laid down behaviours and compliance of the expected norms for the overall benefit of the organisation while the employees themselves would embrace those values and exhibit ethical behaviour in the organisation. From the recruitment stage itself, the need to have employees who are aligned or adaptable to the core values and behaviour of the organisation may have to be ensured, by putting in place stringent talent acquisition policies followed by a methodical onboarding process. Bringing in employees who would play a positive and empowering role in encouraging right behaviour in the organisation would contribute to strengthening it further. In such endeavours, the human resources department can play an overarching and enabling role by being a change catalyst to create and sustain a desirable organisational culture.

The Issues at Hand

In most scandals that have been unearthed it is seen that transgressions are generally well known across the organisation, however, individuals chose to ignore them and did not take the onus to raise the issues at the appropriate level, abdicating their moral responsibility. This collective silence and fear to speak up can be construed as mistrust in the organisational hierarchy or it exemplifies an unbecoming organisational culture. The leadership is often torn between the dilemma of taking initiatives to proactively lookout for misconduct in the organisation which would force them to take punitive action in case of any discovery, or remain oblivious by ignoring the reports of wrongdoings, for the sake of sustaining business and protecting high fliers, until such time it blows up in the face. The proactiveness in scouting for transgressions, can sometimes make good performers nervous and sceptical of cutting corners or overstepping to bolster profits of the company. On the other hand, the attitude of the management to overlook wrongdoings can be very damaging since the employees would take it as acceptable behaviours with enormous ramifications.

Top management would have to be vigilant while dealing with reports of violations since the reports may turn out to be harbingers or ominous indications of a greater malady. The camaraderie and bonding on one hand and connected workspace on the other, may not prompt the co-workers to reveal whole extent of the violations. It is also possible that while obvious cases of theft, or misappropriations would get reported, drawing attention of the leadership to white crimes concerning integrity, conflict of interest, etc., may be avoided by employees fearing retaliation, victimisation or the desire to stay clear of the hassles of corroborating and producing evidence in future investigations. The employees may also believe that such transgressions are seemingly victimless and do not hurt anyone directly, hence does not see the necessity to bring attention of the top leadership to such cases. The perpetrators of such violations would often be holding powerful positions and likely to be successful in their careers having strong influence on the top leadership, hence reports against them may not surface even on the belief that they are enjoying the confidence of the top leadership. The endeavour of the leadership should be to clarify clear boundaries of organisational behaviour and cost of transgressions, which would not only encourage whistle-blowers but would also develop in the employees an intolerance to deviations from the norms of organisational behaviour. It must also be articulated adequately in the organisation that wrongdoings would hurt the organisation and correspondingly all employees and not just the ‘bad apples’, so as to elicit collective effort to address issues of misconduct and empower accountability and good behaviour.

The leniency and quantum of punishments given to offenders would also determine if cases of misconduct would get reported. In case the employees see that the top management is tolerant and lets off the perpetrators with minor punishments, they would see no reason to report future cases. The employees may also fear the scenario where the punished would get an opportunity to victimise those who would have reported the cases. Leniency and overlooking wrongdoings would send a clear signal to potential offenders that indulging in such misbehaviours does not have the associated dangerous consequences in the organisation. It must be ensured that the punishments are not uneven with executives in higher positions getting away with minor reprimands while those in junior positions bear the brunt and are severely dealt with for similar level of culpability. Measure like strengthening the whistle-blower mechanism in the company and ensuring that fair and detrimental punishments are awarded with no partiality towards senior functionaries would go a long way in ensuring fair play and justice thus engraining a culture of intolerance to unethical behaviour in the organisation.

Best Practices

It would be evident in a well-knit organisation; where the organisation plants and nurtures the values in employees, that the employees collectively live the values and the culture, that identifies the organisation. As a spinoff, good corporate governance and the consequent reputation of such a behaviour would provide the organisation with tangible business benefits. All the stakeholders would see the company in a positive light from the vendors to shareholders and may also invite high profile investors. Many organisations have clearly enunciated value statements and policies. However, building an organisational culture is time consuming and hard and clearly it takes much more than a values statement to sustain a truly ethical organisation.

In the context of Bharat Earth Movers Limited (BEML), formerly Bharat Earth Movers Limited, the company has robust and detailed procedures and processes to ensure strict adherence to laws and provisions with traces of typical command and control system legacy inherited by most public sector enterprises. BEML however, is a company in a unique business environment.

BEML is a public sector undertaking under the Ministry of Defence with considerable manufacturing capacity; but it has no guaranteed orders or business does not come through nomination from the government. In all its business verticals, the company is in intense competitive business environment and it is pitted against multinational corporations in commercial competition to win sale orders.

BEML is a pioneer in leveraging technology for business processes and a well-established Enterprise Resource Planning (ERP) with supplier relationship management (SRM) system has been put in place. It is one of the few organisations to implement high level of transparency by directing all purchases to an e-procurement platform. Adoption of e-governance has enabled absolute transparency in the processes and systems. The online file management system is another decisive and impactful IT initiative that has positively impacted the organisation by making decision making transparent, participatory and efficient.

Concerted efforts have gone in to bring in transparency in decision making in the company ensuring a sense of collective and participatory effort in running business. The Committee of Functional Directors play a major role in taking critical decisions in the company after going through inputs from concerned senior leadership and focused deliberations. Ideas are freely exchanged, inputs from those in the field are taken into account and professional discussions are encouraged to bring in a sense of belongingness and ownership. Appealing to inner self based on values and ethics is the norm and professional dissent is applauded and not considered as an act bordering insubordination. All these efforts are having a salutary effect in governance.

An employee satisfaction survey was held to determine the integral role that BEML Limited employees play in upholding brand values. The survey coverage was almost 100 per cent of total workforce. The overall employee engagement mean score for BEML was found to be just below best employer; in the high performance zone with most of the market leaders. Valuable inputs were obtained in the survey, which became the basis for many HR initiatives such as strategy conclave for long term perspective planning of the company, automation of HR services, competency based performance appraisal system, enhancement of travel and dearness allowances, revamping of promotion and transfer policy, etc.

The values which BEML as company cherishes and propagates within the organisation, and the behaviour and ethical standards expected from the employees have been codified. The aim being to create a ‘Values Statement’ which would act as a moral compass for the business practices that expresses the righteousness that individuals and BEML as an organisation should believe in. The ‘Values Statement’ was created through a collective effort by strategy communities comprising middle level managers across all manufacturing divisions. Extensive discussions threw up a list of values that define the company, which were refined by the senior leadership and were finally adopted after detailed deliberations in a strategy conclave involving the entire senior leadership. BEML FIRST, values statement (Focus on Customer, Innovation & Technology, Reliability & Quality, Speed & Responsiveness and Trust & Teamwork) defines the culture and beliefs of the company. The collective and concerted process through which the value statement was created has given it the befitting legitimacy and acceptability.

Conclusion

In any large organisation involved in business, the likelihood of corporate governance issues coming up and transgressions being made, cannot be fully disregarded. The constant flux of manpower, especially at the top level, due to lateral movement or due to retirement, may throw up unsuitable individuals with misplaced personal value systems at higher or critical levels. Thus, wrongdoings can occur and are impossible to be wished away. The organisations should therefore work towards creating a healthy and positive corporate culture with zero tolerance to unethical behaviour and put in place a robust compliance policy framework to ensure adherence to laid down provisions. The top leadership should set high standards in corporate behaviour and ‘walk the talk’. They should clearly articulate the expected corporate behaviour and should act against offenders by giving exemplary punishments irrespective of the seniority or position of the executive. There should a conducive atmosphere where it is psychologically safe to report lapses and unethical behaviour. Leniency to wrongdoers or ignoring actual transgressions can hurt the organisation affecting all the stakeholders adversely. It also makes good business sense to have high corporate governance standards since such companies are valued not only by customers, vendors and employees but also by investors.

BEML has put in place high standards of corporate governance and transparency in all its business dealings, taking support of its committed workforce and leveraging technology. Its robust credentials are helping the company to face fierce competition in all its business verticals from multinational companies and retain major market share in most of its products. BEML as a company realises that it has been accomplishing humble targets in terms of aspirations and potential of the company. The company has many challenges ahead and ‘miles to go’ to harness its true potential. BEML shall undertake that journey upholding its values and with high standards of corporate governance.