A corporate evolution

It is not often that one comes across a book where the author decides to follow his own book’s principles in setting up a company. Shankar Jaganathan, who set up a company, CimplyFive, adopts and espouses the best practices of the book titled Corporate Disclosures.

It is an ideal book for a practitioner seeking sound theoretical base and also provides insights into the whys of financial statements and corporate disclosures. The book is full of anecdotes that take the reader to historic India, Rome, Greece, China and other civilisations.

The book looks into the formation of a company and the need for accounting. He discusses the transformation from mere counting of money to double-entry book-keeping and the growth from guilds to partnerships to joint stock companies.

There are chapters that look at the evolution of balance sheet, the genesis of the P&L statement, cash flow statements and auditing. We get a view of the first balance sheet of Lever Brothers Limited made in 1894, the various benchmarks in voluntary disclosures set by the US Steel Corporation in its first year of reporting in 1902. It tells that Lever Brothers published its first P&L account in 1907, over 13 years after it published its first balance sheet. We also learn that the need for accounting standards was due to takeover battles in England. The two schools on accounting standards -— the rule-based and principle-based approaches- — and their implications are shared in the book.

He talks about the need for companies to reach out to shareholders through various means including the annual report. The importance of corporate governance through board of directors and the evolution of independent directors are some things that are emphasised upon. He looks at how firms made a shift from reporting mere numbers to valuing intangible assets such as human resources, brand and customer base. An entire chapter on annual reports is used to proactively communicate with all stakeholders. The author touches upon the trends in Indian corporate disclosures and given his close association with Wipro, one entire chapter is devoted to the disclosures made by the company between 1947 and 2007. The last chapter discusses excellence in disclosures among Indian companies.

Some lessons that I learnt from this book are that corporate governance stands on the tripod of fairness, honesty and transparency. While fairness and honesty are relatively stable concepts, the nature of transparency is still evolving. From financial disclosures, transparency has now moved to sustainability and risk management of which legal compliance is a critical component. In legal compliance too, transparency in the form of person independent systems and visible dashboards are emerging as critical.

Every board member, aspiring director and senior executive across the world, should read this book to appreciate the need for a better governance model in an increasingly volatile, uncertain, complex and ambiguous world.