Creditors and other stakeholders of troubled companies allege that members of the companies, board of directors and senior management have engaged in problematic corporate governance practices. To solve the issue of governance in financial institutions several reforms have been made in the start of the 21st century, yet just after a few years cases of insolvency grabbed the attention. So the question arises, what might have gone wrong. Why were reforms made so effective? It might be possible that through reforms they just had added a few more laws and policies without improving the working process of boards and members of the company.
It has been seen that usually boards are too large to perform efficiently or they lack expertise in their fields. Hence reform is required in management of working of boards and senior authorities, following action can be taken like reducing the size of board members. The larger the size of the board, the more difficult it will be to reach agreement and fewer actions will be taken. Another important thing is that members of boards should be expert in their fields so that they can make decisions independently. Today’s companies are not just confined to one geographical location they need to travel far – flung locations. They should be expert in evaluating the information they get from their colleagues. They must check the information gap in the company. Experts are well aware of the difference between knowledge and action.
It has been seen that before insolvency took place, members of the board used to meet 6 or 7 times a year, which is too less to understand the working of any big organisation. At least 2 days a month is needed to regulate the functioning of the company, even who is expert in his or her field. The head of the manufacturing department of one US based company made frequent visits to the department. He maintained friendly relations with employees and made sure to review all processes before the delivery. For the first time members of the department began to know what they were doing and how to make it more efficient.
There is no way to improve governance other than significant investment of time by corporate leaders, corporate meetings need not to be static at headquarter only. They must change their location and organise meetings at different locations to regulate it more effectively.
There are several hurdles in finding independent directors with relevant expertise as the most qualified directors are working for company’s competitors or they are retired. Executive of the company already runs a large business and hence has no enough time to serve as professional director. So it can be possible to hire retired executives as they are already experts in their field and no one would like to follow the same schedule for the rest of their life, eating and playing. These retired executives should be given opportunity to work as long as they find themselves fit for the work rather than enforcing them under blanket retirement. Making compensation to profesional director would not require monetary rewards. As they are working for just 2 boards their compensation exceeds nearly double the average annual compensation but this won’t cost much to the company as there would be 5 to 6 Independent directors not 15,16 or more. It would be better if they compensated through stock options as they are already wealthy and their working mindset is long term oriented.
Independent directors would not like to have a job where their exposure to legal platforms increases. If someone willingly helps others and something goes wrong that doesn’t mean he or she will be more liable than others until done knowingly. Similarly international courts never hold independent directors liable for a wrong decision even if it causes loss of billions. Court can penalize independent directors if they have done it with wrong intentions.
Conventionally, board of directors are supposed to set strategic goals, monitor the progress, make appointments of auditors and many more. But the needs of today’s companies are different. Independent or professional directors are required to intervene so that gaps in operation of working of companies can be filled. If professional directors sit at home and meet once or twice a year, to discuss the company’s plan they will not get the essence of working for companies and where they are lacking. If they meet frequently, and spend a significant amount of time gathering information, they will understand companies financial issues much better than sitting at home. They can spend more time with experts to educate them why they are stuck up. So how to perform so that good governance can get established in corporates. If we want companies to adopt this new model, first adoption in government sectors such as banks is needed. It will surely provide security. Some changes have already been seen in the financial sector of Japan, Hong Kong, China. Also shareholders can pressurize directors to adopt a new model. Also large companies under insolvency can get benefit from independent directors. We need to adopt this new culture in improving the working of boards. To accomplish this, legal procedures need to be enforced.