Trusted advisors: True custodians of corporate governance

Corporate India finds its roots shaken yet again, this time by the sudden impact of the Cafe Coffee Day (CCD) misfortune.  How and why did a promising entity with a distinct value proposition turn unviable, to the extent of being deemed a failed business?

The CCD promoter’s fag-end regret—of having failed to create a right profitable model and of having endured fatal pressure from lenders—is as alarming as it is poignant: how does a venture backed by best-in-class venture capitalists, private equity players or angel investors, not to mention independent directors lose its way in this horrifyingly turbulent fashion?

Even prior to the CCD crisis, we have seen a plethora of cases where corporate governance left a lot to be desired on diverse sticky or thorny issues: including complex ownership structures to maintain undue control, caustic ego hassles prone to organisational disharmony, contentious extension of CEO tenures, suspect and opaque deals by the top brass, blatant falsification of accounts, and inadequate or loose disclosures. The trinity of investors, lenders and independent directors could not prevent the said companies from falling into the abyss of fatal derailments or unlawful deviations in all cases.

Moot point: what is it that lures today’s promoters to embark on a winding route of diversions that often lead to derailments? Often it is the immense pressure to grow and show profits quarter after quarter against all odds, to strike the proverbial winning deal often makes promoters vulnerable and even jittery at times. It’s also pertinent to take a cursory look at the challenges that a modern-day business has to grapple with – from the global to the local.

Protracted trade wars, mounting geopolitical tensions, abrupt industry downturns, spiralling debt levels, and widespread tech-enabled disruptions in the business models have sizeable repercussions on a modern-day firm’s businesses and competitive edge, given the spill-over effect of global interconnectedness. The World Uncertainty Index 2019 data has highlighted a sharp rise in global uncertainty across all economies - advanced, emerging, and developing. For emerging markets including India, this causes extreme volatility in capital flows – both the influx and the outgo. For India’s corporate sector, this fickleness has invariably translated into sluggish and stalled investments, inordinate project delays and ever-changing market dynamics.

To make matters worse, many of today’s startups and business models are inherently susceptible to weak governance, and in some cases their flawed and misguided mindsets. Following the sky-high valuations of a few digital startups, new entrants today crave to become the next unicorns, decacorns and hectocorns. At a time, when the Gross Merchandise Value has become a celebrity parameter, the intrinsic value of a company is relegated to the background; consequently, a financial bleed assumes ornamental value, and negative unit economics becomes trendy.

The fear of non-compliance, in such an undesirably liberal environment, is not as strong as the lure of a ‘way out’. Compliance today is a very broad space covering various regulatory as well as contractual obligations. Over time, new regulations spring forth to make risk management a continuously challenging process even on unlikely fronts. Consider the latest CSR directive which invites criminal action for ignoring the CSR spending.

Given the mixed bag of burdens and constraints, the performance anxiety, at times, turns fatal when promoters tend to violate contractual obligations, avoid legal compliance or compromise on governance, with no thought whatsoever to the impending damage.

Clearly, today’s promoters need the strongest guidance of trusted advisors who could analyse the given situation and help resolve a host of issues that invariably lead to dire consequences, if ignored or suppressed. Their role is a unique role of mentoring, a subtle blend of cautious shepherding, at times ruthless cross questioning and studied approvals. We need people of integrity to do this largely thankless job, upright individuals who are seasoned professionals across disciplines blessed with sharp business acumen, exemplary intuition and behavioural competencies, who have seen the highs and lows of business. More importantly, their style of intervention is palatable, perceptive and penetrative, all in the same breath. Such trusted advisors can create a conducive environment that breeds timely red flags, adequate deliberation on contentious trade-offs, and the elimination of pride and prejudice by the decision makers.

Cautious optimism founded on the age-old principles of steering a business profitably and more ethically is the need of the hour. Trusted advisors would help keep desperation out of decisions whether on account of technological and marketing breakthroughs or whilst entering into strategic collaborations, expanding markets or shunning seemingly unproductive divisions.

It’s about time corporate decision makers acknowledges a time-tested fact, endorsed and practiced by several business legends of timeless acclaim – that engaging trusted advisors is not about incurring a superfluous ‘expense’; it is about making much needed prudent ‘investment’. As rightly said by Thomas Moore - "We need people in our lives with whom we can be as open as possible. To have real conversations with people may seem like such a simple, obvious suggestion, but it involves courage and risk."

Views are personal.

The author is M&A Partner, J. Sagar Associates.