Bridging the integrity gap through governance, trust, and transformation

By Arpinder Singh

The last two years have been tumultuous for India Inc. as many companies scrambled from survival to recovery mode. The onset of the third wave of the pandemic at the beginning of the year brought on a looming sense of uncertainty, with companies gearing up for another phase of upheaval. This year’s Union Budget focuses on the ‘four pillars’ aiming at economic upswing and growth, but with factors like the financial crunch still weighing heavy, an evolving work environment, and increased fraud risks, it may not be an easy course to chart. According to EY’s Global Integrity Report 2022, the pandemic has made it harder for businesses to act with integrity. The challenge will be to take the learnings of the pandemic and incorporate them into developing a resilient roadmap to steer through the new normal.

Here are the key priorities for organizations to navigate this ever-changing business landscape with confidence and integrity.

Spotlight on the ‘G’ of ESG

Environmental Social and Governance (ESG) initiatives have picked up momentum over the last year, with new regulations and enforcement actions around ESG reporting. The government’s plan to raise funds for public sector projects through sovereign green bonds, which encourage environmentally sustainable projects and are aimed at reducing the carbon footprint of the Indian economy – as proposed in the Budget – will provide further impetus to ESG goals. In addition to India, several countries are coming up with regulations on aspects of disclosures and reporting and applying stringent norms on penalties and fines on fraud misreporting. With a focus on corporate integrity in practice, not just theory, 2022 will see governance in ESG programs taking center stage – a test of how the management and boards attend to the interests of the company’s stakeholders, employees, suppliers, shareholders, and customers.

Several parameters have to be considered from a governance point of view including anti-bribery and anti-corruption (ABAC) compliance, anti-money laundering (AML) compliance, whistleblowing mechanisms, preventive fraud risk assessment, and third-party risk management. Questions on whistleblowing mechanisms, the willingness and comfort to report, and fear of retaliation are likely to need deliberation.

Securing NFTs in a digital world

Non-Fungible Tokens (NFTs) have taken the world by storm, much like cryptocurrency. The proposed launch of the Indian digital rupee comes as an impetus to blockchain technology and should further accelerate the growth of NFTs. However, it comes with its challenges. Sale of underlying products that may be fake, unauthorized sale by agents using fake websites, cyber-attacks during transactions, networks that facilitate the sale of NFTs being hacked, non-compliance to KYC norms, and money laundering concerns are some areas that are likely to threaten and compromise the authenticity of NFTs. 2022 is expected to witness higher awareness and interest among NFT users to improve the security of smart contracts, determine the authenticity of products and the reputation of the sellers, especially with 30% tax being imposed on virtual digital assets now.

Independent Directors embracing a more dynamic role

With changing regulations and a heightened emphasis on fraud reporting, Independent Directors should be looking at building a deeper understanding and awareness of the risk landscape, overseeing companies with scrutiny, and driving transparency within. Good corporate governance is a key parameter in the sustainability agenda, gradually Independent Directors may handle increased responsibilities on making accurate and timely disclosures on SEBI’s new ESG reporting norms (Business Responsibility and Sustainability Report). They would not only be required to have complete knowledge of the key company developments but would also need to question the conduct of the management on relevant issues such as whistleblowing, fraud reporting, anti-corruption initiatives, cybersecurity, and anti-trust amongst others.

Laying an ethical foundation for IPOs’ success

2021 was almost a historic year for IPOs, with increased funding and high valuations, clocking in Rs 89,066 crore – the highest this decade – as presented by The Economic Survey. With the momentum expected to continue, companies eyeing IPOs should lay a strong base of governance, going above and beyond to include enhanced mandatory corporate governance policies and frameworks around code of conduct, whistleblowing, Director’s independence, corporate social responsibility, grievance redressal mechanisms, anti-fraud, and ABAC. These can enable companies to run a profitable business and grow it ethically, maintaining the faith of both prospective investors and existing stakeholders. Unlisted companies with sky-high potential, backed by an integrity-driven management team with ethical values and commitment, can make their companies’ IPO and journey ahead, an astronomical success.

Manoeuvring dispute resolution and competition law actions

The infrastructure sector, having seen stupendous growth in projects and a boost in investments, should also be wary of potential litigations and claims unless adequate changes are made in the structure of contracts and reforms in legal frameworks. This can also impact the sustainability of the infrastructure companies from profitability, financial liquidity, and health perspective. Recent enforcement actions by the Competition Commission in India reinstates that India Inc. will need to understand the distinction between trade practices and competitive compliant way of trade. Educating management as well as employees to avoid any anti-competitive behavior will be crucial.

Contending in a secure gaming arena

India’s burgeoning virtual gaming sector has grown tremendously. The growth and employment opportunities of the animation, visual effects, gaming, and comics (AVGC) sector were highlighted in the Budget. While this will propel the gaming industry into the bigger league, several challenges need addressing, too. Games continue to be subjected to bot attacks, impacting both gaming companies and gamers. As its popularity continues, the year will see increased emphasis on fair gaming practices, a bot-free experience, encouraging games of skill, improving AML and KYC compliance, and protecting user data. Gaming companies and associations may also adopt self-regulation measures to boost the confidence of gamers and other stakeholders.

(The author is Global Markets and India Leader, Forensic & Integrity Services, EY. Views are personal and not necessarily that of FinancialExpress.com)