How to retain market share & market capitalization?

Corporate Governance in Corporate World 

How to retain market share & market capitalization in a highly-competitive hyper-connected world?

By:

Vijay Sardana

Everyday newspapers are flooded with corporate stories of mis-management and stock market crashing for some reason or the other. At the same time many companies are rock solid and their market capitalization is going up and sales is also going up. 

The basic question is: Why some promoters and top managers are involved in manipulations and mismanagement of their own company and ultimately ruin their own goodwill with their own organisation? 

Why this happens?

As an independent director and member of various policy-making bodies both in private as well as public sector, author do get a chance to interact with many business leaders and investors on a daily basis and what I observed is that issues are most common but there is resistance in accepting the facts that things are going out of control due to several reasons.

One of the reason is the lack of effective systems within the organisation. Even if there is a system, there is a lack of desire to follow the same by the decision makers themselves. This culture then percolates down the line and after some time the organisation loses the direction.

Why Companies lose their market share and market capitalization?

Before we into this subject put yourself in the place of consumers and shareholder, then think and think again:

·      Do you want to buy any product of any company, if you are not sure about the stated claim or quality about the product?

·      Do you want to invest your money in any company when you have doubt that something is wrong with the governance of the company?

Any logical person will try to avoid such situations.

Implications:

Implications are clear and simple - reduces sales and reduces market capitalization.

It means no one wants to feel cheated. People want to feel secure and assured about the products and company management to support the growth.

This is applicable in all aspects of life. If we fail in ensuring these basics, this leads to downfall. Example study the 10 biggest downfalls of the companies in any country, you will find a common trend.

So, what is the way forward for decision makers both in corporate and in the regulatory world:

Step 1: Focus on Corporate Governance

Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled.

Corporate governance essentially involves balancing the interests of a company's many stakeholders, such as shareholders, management, customers, suppliers, financiers, government and the community. All are important for your success. If you favour one, this will create doubt on your intention and this means dealing with you is risky and others will leave you.

Since corporate governance also provides a framework for attaining a company's objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

Corporate Governance is vital for sustainable corporate growth:

Governance refers specifically to the set of rules, controls, policies and resolutions put in place to dictate corporate behaviour. Proxy advisors and shareholders are important stakeholders who indirectly affect governance, but these are not examples of governance itself. The board of directors is pivotal in governance, and it can have major ramifications for business growth and equity valuation.

If you are following Corporate Governance, share it with all:

Communicating a firm's corporate governance is a key component of community and investor relations.

Good companies on their investor relations website share the firm outlines, its leadership and governance, including its executive team, its board of directors and the firm's committee charters and governance documents, such as bylaws, stock ownership guidelines and articles of incorporation.

Many companies do communicate nowadays, but they don’t follow them. For such companies, the outcome is disastrous example Enron, Satyam, ILFS and many others and all major NPAs. Many companies those who lost valuation drastically are also an example of poor corporate governance and ineffective Board of Directors.

Corporate Governance and the Role of Leadership i.e. Board of Directors

The board of directors is the primary direct stakeholder influencing corporate governance. Directors are elected by shareholders or appointed by other board members, and they represent shareholders of the company. The board is tasked with making important decisions, such as corporate officer appointments, executive compensation and dividend policy. In some instances, board obligations stretch beyond financial optimization, when shareholder resolutions call for certain social or environmental concerns to be prioritized.

Boards are often made up of inside and independent members. Insiders are major shareholders, founders and executives. Independent directors do not share the ties of the insiders, but they are chosen because of their experience managing or directing other large companies. Independents are considered helpful for governance because they dilute the concentration of power and help align shareholder interest with those of the insiders. When this alignment fails, this leads to risk and mismanagement.

Good and Bad Governance

Bad corporate governance can cast doubt on a company's reliability, integrity or obligation to shareholders — which can have implications on the firm's financial health. Very often this also impacts sales because consumers also lose confidence in product integrity, quality and sometimes availability of after-sales service.

Competitors also encash these situations to the fullest to their advantage by spreading such news and also discussing the risk in dealing with such companies with their existing and potential customers.

Tolerance or support of illegal activities can create scandals like the one that rocked Volkswagen AG in 2015 when it was revealed that the firm had rigged engine emissions tests in America and Europe. Volkswagen saw its stock shed nearly half its value in the days following the start of the scandal, and its global sales in the first full month following the news fell 4.5%. Example of Satyam, NSEL and ILFS ensured that management is removed and regulatory interventions were required.

Common problems observed in Corporate Governance:

Companies that do not cooperate sufficiently with auditors or do not select auditors with the appropriate scale can publish spurious or noncompliant financial results. Bad executive compensation packages fail to create an optimal incentive for corporate officers. Poorly structured boards make it too difficult for shareholders to oust ineffective incumbents. Corporate governance became a pressing issue following the 2002 introduction of the Sarbanes-Oxley Act in the United States, which was ushered in to restore public confidence in companies and markets after accounting fraud bankrupted high-profile companies such as Enron and WorldCom and companies like Satyam and ILFS in India.

Good Corporate Governance Build Confidence:

Good corporate governance creates a transparent set of rules and controls in which shareholders, directors and officers have aligned incentives. Most companies strive to have a prominent level of corporate governance. For many shareholders, it is not enough for a company to merely be profitable; it also needs to demonstrate good corporate citizenship through environmental awareness, ethical behaviour and sound corporate governance practices.

The Way Forward:

In coming days, Corporate Governance will be the deciding factor in the growth or any organisation. Neither shareholders and nor regulators are keen to take corporate governance issues lightly. It is in the interest of promoters and top management to ensure good corporate governance because nothing is hidden for long and messages from whistleblowers’ spreads like wildfire due to social media and interest. This can ruin the goodwill and status of all involved in bad management and may also lead to regulatory action including imprisonment.