The Gyroscope of Corporate Governance

Context: Importance of checks and balances has been a major element of both political and corporate governance.

Checks and Balances in governance: It thrives on the gyroscope principle such that effective institutions will balance excessive swings along some axes.

• In corporate governance: depends on four institutions — Board, Management, Stakeholders and Regulators
• In political governance: depends on the four estates— Legislature, Executive, Judiciary and Media.

Problems associated with corporate governance:

• Deranged leadership: It is often seen that the power damages the leader’s brain and diminishes the very emotional capacity of empathy that helped the leader to rise in the first place.
  • E.g. some decisions of chief marketing officer of General Electric (GE) in 2003 resulted in the company's decline.
• Little governance: due to coalescence of the board, management, stakeholder and regulator into one.
  • E.g. Nationalisation of Tata airlines in 1952(to Air India) and removal of its chairman in 1978 without consultations.

Benefits of checks and balances in corporate governance

• In corporate governance - It builds consumer confidence: E.g. checks and balances worked in case of Nestle India where determined management and a strong board overcame a crisis of consumer confidence, arising from regulatory intervention. 
• In political governance: It serves National Interest, E.g. -
  • The American government took over an arrogant company that supplied war-time essentials in 1944 (as the supplies were disrupted due to labour union disputes) and handed it over to the Army.
  • The Indian electorate rejected the Emergency in 1977 and voted out a smug government in 2004.