Bad governance is often a result of misconceived values and blind biases. Can regulatory systems influence such behaviours in corporates'? (200 words)
Refer – Live mint
Enrich the answer from other sources, if the question demands.
IAS Parliament 6 years
KEY POINTS
· As corporate India’s health is critical for India’s future, sound corporate governance needs to be the key enabler to manifest this reality.
· India, like other countries in Asia, has not had much time to change from a promoter-led “insider” corporate governance system.
· In insider systems, the biggest issue to deal with is the conflict of interest between strong promoters and weaker minority shareholders.
· Promoters’ controlling stakes provide manoeuvrability in the initial stages of corporate life.
· But several studies highlight the succession problems family owned businesses invariably face.
· These values and blind biases often resulted in bad governance.
· Embracing corporate governance best practices is important for family managed firms not just for protecting minority shareholder interests but also for ensuring the survival of the firm itself.
· Yet, awareness and voluntary acceptance of best practices never have been forthcoming. The need to regulate corporate governance is clear.
· E.g. Among all the recommendations in the Kotak committee report, the regulatory capacity aspect stands out the most.
Role of regulators in ensuring good governance
· Extensive monitoring and a disproportionate cost of non-compliance strike fear at the heart of all incentives to commit illegal activities.
· These mechanisms introduce reinforcing feedback loops.
· Complying with laws can then become personal effortless behaviour.
· Exemplary penalties on non-compliance act as reminders and can provide a strong behavioural nudge towards better governance.
· Robustly equipped regulatory systems can influence and nudge companies towards better behaviour.
· Such systems have a key role to play in bringing about a meaningful shift towards a superior governance culture.
Suggestion
· The Kotak committee report has made three important recommendations for enhancing regulatory capacity: scaling up employee strength, setting up units for data science/risk and building cross-regulator platforms for enforcement.
· It would be appropriate to find global benchmarks on employee strength across comparable regulatory departments.
· It will also be necessary to identify operational best practices around the world.
· Evidence-based inputs on these aspects could contribute to better policymaking in these areas.
