Authors:*Sukriti Srivastava & **Satvik Shukla
“There is one and only one social responsibilities of business to use it resources and engage in activities designed to increase its profits so long as it stays within the rule of game, which is to say, engages in open and free competition without deception or fraud and this under the hands of Senior management.”
-Milton Friedman
Table of Contents
Introduction
The business is managed by many, but control is predominantly in the hands of senior-level management. This centralized authority aids the company’s comprehensive growth, spanning from corporate governance to economic prosperity. This paper establishes the relationship between the role of senior-level management in the company and the positive impact it has on governance. In an era dominated by AI, which is assuming many essential roles, there are still areas in senior management where the human mind surpasses machine capabilities.
This human intellect has long been dedicated to fostering a better work culture, benefiting not only the company’s employees but also employers and external stakeholders, if any. As rightly pointed out by the Cadbury Report in 1992[1] that the corporate governance is as the form through which the companies are directed and controlled. Senior management or executives plays an important role in the effective functioning and governance of any company.
At the top of the organizational hierarchy, senior level executives bear the responsibility for the entire company’s performance and are accountable to the board of directors. The managing director[2], the chief executive officer[3], the chief financial officer[4] and other top-level personnel are included in this. They generally determine organizational goals and strategies by setting policies and directions, resource management and business control.
The senior management together with the board establish a clear vision, mission, values and strategy for the company which must be consistent with shareholder expectations and long-term interests. Helping to achieve an advantage over rivals is one of their key roles as they strive towards increasing global market pressures. This achieved through emphasis on cost reduction as well as product and service quality alongside market responsiveness. There leadership qualities have resulted in positive work environments that secure commitment from employees. The senior executives also assist the board of directors in upholding ethical standards, procedural safeguards and shareholders’ rights under corporate governance.
These include monitoring performance, risk management; appointing/evaluating managerial staff; ensuring an appropriate culture/ethical environment prevails within. Furthermore, even the composition and structure of the board of directors are essential factors for effective governance, requiring a mix of executive and non-executive directors, independence, and diversity.[5] Periodic evaluations of the board’s performance and governance practices, with transparent reporting to shareholders, further contribute to the effectiveness of the company’s leadership and governance. Their influence is instrumental in shaping the organization’s direction which contribute to sustained success in the dynamic business landscape.[6]
Apart from that, Company’s confidential and proprietary information is its asset. It should be noted that the senior executives are duty bound to protect confidentiality to introduce checks for this purpose. The senior executives have an obligation not to disclose confidential information they receive in their positions respectfully. This kind of information should only be used for business purposes of the Company. That obligation remains binding even after ceasing directorship/employment with the company.
Similarly, any such confidential information received by them from third parties must be treated as strictly confidential. Therefore, numerous covenants like covenant not to compete are signed by senior executives in which it is an agreement between employees and employers where employee promises not to compete with employer within a particular period once the employment relationship ends and/or within a given geographical area at all costs.
Implication of withdrawal of senior executive from driving seat
Hence, when a senior executive departs, it has implications for governance, impacting stability and strategic orientation. This becomes particularly significant when executives exit a company to join competitors, creating a leadership vacuum and causing a temporary or prolonged gap in decision-making. This disruption affects both day-to-day operations and long-term planning, fostering uncertainty among employees, investors, and stakeholders.
The recent departure of OpenAI’s co-founder Sam Altman[7] and the subsequent threat of mass resignations from senior staff not only presented immediate operational risks but also cast uncertainty on the company’s future. Senior executive exits may result in the loss of vital information about the company’s history, industry dynamics, and competitive landscape, hampering the remaining leadership’s ability to make well-informed decisions. Instability can ensue, leading to diminished morale and productivity, further impacting overall governance. Moreover, these departures play a pivotal role in shaping the company’s reputation, potentially creating negative perceptions among stakeholders.
Recent events at Wipro, such as CEO Thierry Delaporte’s rumoured departure and the legal action against former CFO Jatin Dalal following his resignation, highlights the substantial impact of senior executive exits. Leadership uncertainties, particularly at the CEO level, can introduce market volatility, affecting investor confidence and stock prices.
Additionally, the legal dispute adds complexity, potentially disrupting financial stability and operational continuity. When executives depart for rival firms, there is a risk of taking valuable intellectual property, raising governance challenges related to protecting proprietary information and ensuring compliance with non-disclosure agreements. Such sudden exits may also reveal weaknesses in a company’s succession planning, emphasizing the importance of thorough planning for leadership transitions to maintain governance stability and ensure a seamless handover of responsibilities.
Impact of ESG
This governance forms the one-third of the Environmental, Social, and Governance (ESG) equation. The G is foundational to the realization of both the E and S. Instances of environmental or social non-compliance within a company often trace back to deficiencies in corporate governance, encompassing inadequate anti-corruption measures, bad incentive frameworks, or unprepared senior executive leadership.
The efficacy of corporate governance holds sway over the integrity of ESG disclosures. Carefully deploying the enumerated factors is instrumental in ensuring the adequate representation of the ‘G’ in ESG within rating and reporting frameworks. This approach heightens the probability of companies fulfilling their environmental and social commitments. Various factors impact the governance of any company, includes business ethics, composition of the board, senior management leadership, risk mitigation, crisis management, allocation of resources, and reporting structures amongst others.
Conclusion
The importance of good corporate governance in corporations has become more important in the backdrop of recent trends in ESG. This is where top managers and executives play a central role in shaping as well as maintaining governance standards. In this regard, the exit of key personnel such as Jatin Dalal, who was CFO, raised questions about the overall framework for governance. The loss of senior level executives can lead to confused policies on ESG which may be imposed by a new management team.
Whenever a company loses its senior executive then it ends up destroying its financial controls hence undermining transparency and accountability. Consequently, the removal of senior executives from companies signals that there is an increasing need not only to attract but also keep valuable human resources so that there can be sustainable administration based on changing ethical and sustainability standards associated with ESG best practices.
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*Sukriti Srivastava, 5th year student in Maharashtra National Law University Nagpur.
**Satvik Shukla, 3rd year Student in Maharashtra National Law University Nagpur.
[1] Cadbury A, The Financial aspects of Corporate Governance, (December 1992), https://www.ecgi.global/sites/default/files/codes/documents/cadbury.pdf.
[2] Anonymous, ‘Who Is Managing Director?’, Institute of Directors, (11 September 2023) https://www.iod.com/resources/factsheets/company-structure/what-is-the-role-of-the-managing-director/.
[3] Peterdy K, ‘CEO (Chief Executive Officer)’, Corporate Finance Institute, (27 October 2023), https://corporatefinanceinstitute.com/resources/career/what-is-a-ceo-chief-executive-officer/.
[4] Grant M, ‘What Is a Chief Financial Officer (CFO)? Role & Responsibilities’, Investopedia, (12th March 2023), https://www.investopedia.com/terms/c/cfo.asp.
[5] Anonymous, Principles of Corporate Governance, The Harvard Law School Forum on Corporate Governance, (8 September 2016), https://corpgov.law.harvard.edu/2016/09/08/principles-of-corporate-governance/.
[6] Anonymous, Governance, risk management, compliances., (2 December 2019). https://www.icsi.edu/media/webmodules/GOVERNANCE_RISK_MANAGEMENT_COMPLIANCES_AND_ETHICS.pdf.
[7] Ed, ‘Why Did Chatgpt Creator Openai Oust Its CEO Sam Altman?’ Frontline, (18 November 2023), https://frontline.thehindu.com/news/openai-ousts-altman-as-ceo-board-says-it-lost-confidence-in-him/article67546943.ece.
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