Eternal Vigilance – Governance and Risk Management

Recently an Indian garment exporter (IGE) lost a US client worth almost $100 million. Over a 4-5 day period, the stock found its new level – 45% below its price a week back. 2 other US clients are now reviewing their relationship with this company.

How did this happen? In a nutshell, IGE had committed to their client, that the products they supplied would be made using Egyptian cotton. The client discovered that for two years, IGE’s products were made out of some other cotton. Resultantly, they terminated the contract. IGE has not denied the allegation. They have declared that they are appointing a big 4 firm to audit their supply systems and processes. Of course, all this is public news.

Did the Board of the Company know about the substitution of Egyptian cotton with another type of cotton? Did they at least know that their company had committed to such a product specification? How do Boards understand the risks faced by their company and how do they keep track of the company’s activities to ensure that the company does not fall afoul of the commitments it made?

Boards or Company management cannot provide for all eventualities. But, regularly and continuously tracking key parameters, that can affect a company’s continued well-being and growth is an obvious minimal requirement. The Risk Management Committee of the Board and the Audit Committee (and Compliance Management Committee – if they are two separate committees) are tasked with identifying information sources within the company and outside to obtain inputs that will keep track of these critical don’ts. And, they may feel that quarterly meetings are too few and far between, for keeping on top of situations that are fast emerging and rapidly changing.

Good corporate governance implies that the company’s Board tracks specific areas of keen interest for the company.

  1. Tracking major risks to the continued success of the Company’s business – for example, adherence to the terms of major contracts of the sort that IGE had with its client.
  2. Tracking implementation of all Board decisions, as desired by the Board
  3. Legal compliances. Ensuring that all Statutory and Regulatory compliances are met on time, all the time – at least the most impactful of them.

The need, increasingly, is for a mechanism to provide information on an ongoing basis – instead of the typical silence between Board / Committee meetings that Directors have been living with hitherto. A web-portal with on-going updates on legal Compliance, on implementation of Board Decisions and for tracking of contract terms adherence (as also other parameters identified by the Board’s Risk Committee) has now become an integral part of doing business. Directors must now be ever-agile and always alert.

“Eternal vigilance” is the price the Board must pay for their company’s survival and continued success!

An appropriate Board Management portal, run by a Secretarial Department that is quick on the uptake, is a critical necessity for business today!

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