The last one year has seen a spate of one-off compliance relaxations triggered by the COVID-19 pandemic. It ranges from reduced TDS rates on business income to dispensing with the need to hold a separate meeting of independent directors. This brings us to the moot question, should companies blindly use all the relaxations provided or use their discretion? Answer to this question hinges on whether the company want to be a compliant corporate citizen avoiding penalties or a role model of good corporate governance safeguarding the interest of all its stakeholders. Listed below are five questions that can help corporate professionals guide their company on its right path.
- Is the regulator/stakeholder providing the relaxation or consent incurring the cost of that relaxation?
Using the examples at two extremes of reduced TDS rates and dispensing with a separate meeting of independent directors, we can see that lower TDS rate is provided by the regulator who is bearing the direct burden of lower collections. In contrast the decision to dispense with a separate meeting of independent directors is taken by regulator, while the cost of inadequate supervision on the company is paid for by the shareholders and other stakeholders. Hence a company pursuing good governance would have no hesitation with lower TDS rates, but would think twice before dispensing with the separate meeting of independent directors.
- Is it ineffective or expensive to ensure compliance in the given environment?
All business decisions are driven by cost-benefit analysis, and compliance decisions are no exception. Incremental compliance cost that needs to be incurred due to the onset of pandemic can be a key consideration for using the relaxation provided. Another factor could be that the end objective of compliance is rendered ineffective due to the constraints imposed by the pandemic if the relaxation is not availed. For instance, a longer time taken to present audited financial statements may be acceptable for companies that do not have access to robust IT and telecommunication infrastructure to enable remote audits.
- Can using the relaxations dilute the compliance culture in the company?
Compliance tasks by their very nature do not rank high on business priorities in many organizations as their contribution to business results are neither immediate nor direct. Their benefits are often indirect and visible only in the longer run, seen in higher stakeholder trust and higher business valuation due to better governance practice. Creating a positive compliance culture requires sustained practice. Given this, any relaxation used should be evaluated by its impact on diluting the compliance culture in the company and hence used judiciously.
- Can using the relaxation adversely affect the interest of any stakeholders?
A company is an amalgam of different interest groups with all the interests not being fully aligned. Even within a stakeholder category like investors, we have insiders vs outsides, promoters vs institutional and retail shareholders, and among financial resource providers, lenders vs. shareholders. In using any relaxation, the interests of different sections of the stakeholders need to be balanced to ensure that no one section benefits at the cost of another, and wherever possible, if the interest of one section is adversely affected, to see if the interest of the affected party can be protected by the company using any other method. For instance, where the financial results declaration is delayed, the trading window for insiders can be closed for a longer period to ensure that the insiders are not unduly benefited.
- Is the relaxation being used in the best interest of the company or to benefit any one set of stakeholders?
While actions are what are visible to the external world, a key element that surfaces sooner rather than later is the intent of the decision makers. Ethics or intent has a major role in ensuring decisions are taken in the interest of all stakeholders for the benefit of the company. Though not visible in the short run, often this is what emerges as a key determinant of good governance and hence should be a key consideration in using the relaxations provided by the regulators.
To conclude, while deciding on using the relaxations provided by the regulator, we need to keep in mind that a compliant company is only the minimum expected behaviour from a corporate citizen, and good corporate governance requires the best behaviour that a company can exhibit. Leaders in good corporate governance will be the ones who use these relaxations judiciously and when availed, explain their rationale for it.