Risk analysis, reporting and corporate governance

This posting refers to the article “The Spirit Of Corporate Governance” by Nitin Bhatt of E&Y that appeared in Economic Times dtd Dec 27,2006.Being the Associate Director, Risk & Business Solutions, he talks about corporate governance mostly from a risk management point of view. I would like to highlight two issues, one from my analysis of risk management and reporting practices of Indian companies and two, of the corporate governance practices of Indian companies. On the risk management & reporting practices, a large number of companies still don’t indulge in a systematic analysis of risks and how they are going to manage risks, if they identify the risks. Take the case of RIL, the biggest private sector enterprise in India. Informed people are aware of the split that happened in the promoter family. Why is it that none of the companies belonging to the two factions identified the possible risks that may arise following the demerger schemes in their annual reports of the immediate next year? If you see the annual report of RIL for the year 2005-06, the whole of “Risk and Concerns” and “Internal Controls “are covered in just one-and-a-half columns of the annual report. Everybody knows that a company of the size of RIL and with the kind of products they handle, they are subject to a very large number of risks. But they have chosen to play them down and included what is mandatory to meet the regulator’s requirements –to include a risk identification and management section in the annual report. Compare it with the “Risk Analysis & Management” report of Carborundum Universal Limited, a much smaller company belonging to the Murugappa Group. The company management has detailed every conceivable risk in the report and has detailed risk mitigation plans for each of those risks, , running into three pages. Many smaller companies provide a better picture compared to many other bigger companies. Among bigger companies, Infosys stands out. The board & management should move beyond the “box-ticking” exercises and have the real intention of analyzing & reporting risks and what actions they plan to mitigate those risks. For this they should understand the benefits the target constituencies will derive from such meticulous reporting.
Coming to the corporate governance practices of Indian companies, a majority of them look at it only from a compliance point of view , even when it comes to some of most respected industrial houses or companies. Here again, none of the “hardware” aspects like board structure, committees, or statistics will result in good governance if the “software” is missing. The software includes the intention, communication to all constituencies –internal as well as external, transparency as a practice, the value the company ascribes to better governance and the values it adheres to etc. Everybody in the company including the promoters should believe that it is better to be better governed. And board has to assume the role to make it happen.