According to the Merriam-Webster dictionary, governance is “overseeing the control and direction of something.” According to the Oxford dictionary, it is the “action or manner of governing a state, organisation, etc.”
Governance is more than the dictionary meaning. Let’s take these two situations as anecdotes.
– When you reach a crossroad and notice red light signal, what do you do? You stop till the signal turns green. It is easier to act and behave in this situation because there are existing rules to follow.
– In the second situation, what do you do if you are at a crossroad with heavy traffic and no signal? You gauge all traffic and make the best decision that suits you without harming anyone and, if possible, giving way to others to cross the road with you without causing a jam.
In the second situation, your governance comes into play because there are no rules, and you decide in the interest of all stakeholders, including you.
When there are an existing set of business rules, a company’s management can abide by those rules. But you can not make written rules for all situations because businesses function in a dynamic case, and you often encounter new problems. And, some aspect of the business is left out of regulations to some degree, considering that the organisation is the best decision-maker for them. E.g., when a company makes a profit, it is left to decide where to deploy this money – distribute to shareholders as a dividend, keep it as a reserve, plough into company expansion or take a mixed approach.
For a business, governance is “taking appropriate decisions in the interest of all stakeholders when there are no existing rules, and no one is watching you.” The experience and expertise of the Board of Directors come into play to suggest to the management what should be the ideal actions in such situations.
Hence, the role of BoD goes beyond seeing if the company is complying with applicable regulations. And independent directors become crucial to take decisions not only in the company’s interest but in the interest of all stakeholders, giving them the way to grow and cross the road, as I used in the anecdote above.
