This article has been written by Gadepally Sadanand pursuing a Personal Branding Program for Corporate Leaders from Skill Arbitrage and edited by Shashwat Kaushik.

This article has been published by Shashwat Kaushik.

What is corporate governance

Corporate governance is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, which can include shareholders, senior management, customers, suppliers, lenders, the government, and the community. As such, corporate governance encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate disclosure.

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Corporate governance for a company lays down rules, procedures and guidance on how to run the company, its operations and its management. The Board of Directors is the main implementer and guiding light for corporate governance in a company. Corporate governance ensures the balance of interests of various stakeholders in the company. Poor implementation of corporate governance may lead to poor operating performance, loss of business and ultimately affect the profitability of the company, effecting both internal and external stakeholders. Corporate governance is a set of rules, procedures, controls, policies and resolutions put in place by the company to direct the behaviour of the company so that it takes care of the diverse interests of the stakeholders without bias towards any one of them.

Corporate governance ensures transparency in  the business dealings of a company and is driven by the Board of Directors; other stakeholders like shareholders, lenders, service providers, suppliers, employees, etc. also impact corporate governance. The key to corporate governance is to communicate to the stakeholders the company’s philosophy regarding its policies, its concern for the environment, sustainable development, corporate social responsibility, ethical and transparent behaviour, approach to risk and risk management, among other corporate governance practices. 

Most successful companies are seen as good corporate citizens who follow corporate governance principles, as they are seen as taking active participation in areas like the environment: green initiatives), social behaviour (participation in areas of education, health, and community development),  actively disseminating information on their financial performance, about their board composition, giving information about conflicts of interest and risk management, as well as how the company mitigates the  risks and manages the conflict of interest.

Principles of corporate governance

The main principles of corporate governance are responsibility, accountability and transparency in corporate practices. It includes principles of fairness, risk management, and equitable and fair treatment of shareholders, giving them a chance to express their opinions/views. The shareholders not only expect profitability but also expect the company to be responsible towards the people, the society and environment in which it operates. 

Successful companies follow the principles of fairness, transparency, responsibility, accountability, and risk management as an effective corporate governance model. The above mentioned principles are explained under:

  • Fairness: The Company treats its various stakeholders fairly, whether internal stakeholders like employees, executives or Shareholders or external stakeholders like vendors, lenders, etc.
  • Transparency: The board timely, accurately and clearly reports the financial performance of the company and keeps the shareholders and other stakeholders informed of conflicts of interest and risks and the steps taken to mitigate them.
  • Accountability: The company board is accountable for the activities/performance of the company, its results  and achievements. The board and management are accountable for the capacity, potential and performance of the company and these are to be clearly communicated to the shareholders and other stakeholders.
  • Risk management: The board and management are responsible for identifying the risks the company faces or is likely to face and taking steps to bring in processes to reduce the risks. They must act on the recommendations of the experts to manage the risks. The Board is responsible of informing the existence of risks and the actions taken , being taken to control them to the shareholders and stakeholders.
  • Responsibility: The Board is overall responsible for the performance of the company. It is responsible for corporate governance, including the management of the company. It must support the current successful performance and be responsible for new initiatives the company takes up. The board is responsible for the selection and appointment of a CEO. It is responsible for the shareholders and stake-holders interests.   

What are the benefits of corporate governance

Good corporate  governance establishes policies, rules, procedures and systems that are transparent, i.e., clearly spelled out and that guide leadership. The interests of the shareholders, directors, management and employees are equally and fairly looked after. The governance model increases trust between the various stakeholders, like investors, the community and regulatory officials. Corporate governance gives a clear picture of the  direction in which the company is moving and its business integrity. Long-term viability, opportunity, returns, enhancement of share price, raising capital from the market. Corporate governance checks corruption, waste, poor financial performance and ring fence risks. Corporate governance leads to long term success.

Role of board of directors

The Board of Directors is  primarily responsible for corporate governance and the main drivers of its implementation. The directors are elected by the shareholders or by the board. The directors can either be insiders, i.e., shareholders, promoters, from the management team or outsiders (independent directors) who are brought into the board for their expertise in managing other companies or experts in technology, finance or other such areas that the company feels will help in the governance of the company and protect the interests of the shareholders and others. Independent directors are there to counterbalance the concentration of power in the hands of insiders and give shareholders a sense of confidence that their interests will be protected. The Board of Directors, amongst other functions, appoints the CEO, formulates the dividend policy, executive remuneration policy, risk management policy, etc. The board of directors not only has to deliver the financial results/performance of the company but also actively implement the obligations towards the environment, social obligations and sustainable growth. The board of directors ensures that the corporate governance policies incorporate policies of risk management, fairness, transparency, responsibility, and accountability.

What are intellectual property rights

Intellectual property can be defined as somebody’s creation, invention, or idea that can be protected under law from being copied by someone else (Cambridge Dictionary). Intellectual property  rights give the owner/company to grow, leverage and make a profit. The basis of intellectual property rights is that the creator, inventor or originator of an idea should have the right to exploit and reap benefits as the creation is the result of his/her/company’s hard work. The recognition of the commercial value of the IP and the right of the owner to derive benefits from it.

These intellectual property rights (IPR) are territorial rights that can be registered with legal authority and used by the owner, sold, licenced or assigned. IPR provides a legal environment for investors, creators, inventors, scientists, artists, designers, writers, etc. A well thought out IPR system is a step in the journey of a country towards innovation and development.

Categories of intellectual property

In India, intellectual property is categorised  based on the types of inventions and creations of the human mind and their applications, as follows:

Patents

They are an exclusive right given to an invention, which is a product or process that gives a new way of doing something or a new technical solution to an existing problem. For getting a patent, some of the criteria are novelty and usefulness. A patent is given for 20 years.

Trademarks

A trademark is a distinctive sign that identifies services or goods provided by an individual or an enterprise. Registration of a trademark is prima facie proof of its ownership and gives statutory rights to the proprietor. The trademark right can be held in perpetuity. First , it can be registered for 10 years and then renewed periodically. A trademark helps consumer identify quality goods or services which he would like to consume,, e.g., Hallmark, Wool-mark etc.

Copyright and related rights

Copyright is a term given to an artistic or literary work by the creator of such work. The copyright is registered and the creator has the right to sell it to an individual or an enterprise who can best market it in return for payment The payment is based on the extent of actual use of the copyright, and the payments are then called royalties. Copyrights cover literary works like novels, plays, poems, reference works, newspapers, computer programmes, databases, and artistic works such as musical works, dramas, films, photographs, sculptures, paintings, drawings, etc.

Geographic indicators of source

A Geographical Indicators (GI) sign is given to goods or products that have a specific geographical origin and possess characteristics, properties or qualities associated with that particular geographical location, e.g., Darjeeling tea or Basmati rice. Handicrafts are also covered under this. The GI right can be registered for 10 years and then renewed periodically.

Industrial designs

Industrial designs refer to the creative activity that produces a formal product or a good and ”design right” refers to the original design that is accorded to a proprietor who has a validly registered design. The Designs Act of 2000 is the existing legislation on industrial designs in India. The registration of industrial designs is initially for 10 years and can be extended by another 5 years.

Trade secrets

Any confidential information that gives a company a competitive edge over its rivals can be classified as a trade secret. Trade secrets cover areas of manufacturing, industrial or commercial secrecy. Any person other than the holder of the trade secret is an unauthorised user and engages in unfair practices and violations of the trade secret. Trade secrets are protected without registration and are protected for an unlimited period of time.

Semiconductor Integrated Circuit of Layout Design (SICLD)

Electronic devices have become compact because of  integrated circuits, which are designed by creative minds and qualified experts and involve large investments by enterprises. Thus, the SICLD Act of 2000 has protected the rights of the enterprises or individuals who have created them and registered these designs for exclusive use and exploited the registered designs commercially  and any infringement by unauthorised use  can be acted upon. Initially, the registration is for 10 years.

Protection of plant varieties and farmer rights

The objective of this act  is to recognise the role of farmers as cultivators and conservators, recognise the contribution  traditional groups like tribals and rural farmers make towards bio-diversity and stimulate investment  in R&D to develop new varieties of seeds/plants.

Protection of biological diversity

The Biological Diversity Act of 2002 benefits conservators of biological resources, creators and holders of knowledge and information relating to the uses of biological resources

The IPR Policy 2016, adopted by India, aims to encourage creativity and innovation. It aims to reinforce the IPR framework  and create awareness about the economic, social and cultural benefits of the IPR. IPR policy also encourages the generation and commercialization of IP and has a mechanism for protecting and adjudicating in cases of infringement.

Acts governing various IP

The various acts under which IP is protected in India are the Patents Act of 1970, the Copyrights Act of 1957, the Trademark Act of 1999, the Designs Act of 2000, the SICLD Act of 2000, and the Biological Diversity Act of 2000. These Acts provide protection to the inventor, creator, originator or owner of intellectual property and allow remedies for them if anyone infringes on or uses the IP without permission.

Licencing of IP

Licencing is a major aspect of IP rights. Licencing is a contract between the owner of the IP, known as the licensor, and the second party, the user of the IPR, called the licencee. The agreed consideration for the use of the IPR is called royalty, which is paid by the licencee to the licensor. Licencing does not transfer ownership. In IP licencing, the licencee is allowed to use the IP, which is subject to the conditions of the agreement and the payment of royalty. The licencing agreements can be categorised mainly into three categories:

  1. Exclusive licence: The licencee is sole user of the IPR and even the licensor cannot use the IP during the contract period. However, there is no transfer of IP rights.
  2. Sole licence: In this licencing, the licensor and licencee both have right to use IP, but they have no authority to transfer the rights to third party.
  3. Non-exclusive licence: In this licence, the IPR right is not only given to the licencee but the licensor has the right to give licences to others/ any other third party .

Normally, the licensor uses a mix of the above. E.g., an exclusive right to a licencee over a  geographical area. 

The World Intellectual Property Organisation classifies IP licencing into three categories:

  1. Technology licence agreement: In this agreement, the licencee is allowed the right to use a patent, a know-how or a trade secret, subject to some conditions and restrictions imposed by the agreement.
  2. Franchise or trade-mark licence agreement: A trademark is a distinctive sign or a way of distinguishing goods or services of  one enterprise from another. The right to use the trademark is given by the franchiser to the franchisee, subject to the condition that the franchisee will maintain the same quality of goods or services as that of the franchiser, as there is an element of reputation and goodwill involved with the franchiser.
  3. Copyright licence agreement: Copyrights cover literary works like novels, articles, plays, newspapers, computer software, databases, etc., and artistic works like paintings, drawings, sculpture, cinema/films, dramas, music, etc. The right to use such work by way of reproduction or publishing by any person/company/enterprise is granted by copyright licence agreement.

Difference between assignment and licencing of IP rights

In a licencing agreement, the licencee has only the right to use the IP in a particular way and for a particular period and the licensor still has interest in the IP.

In the case of assignment, there is a complete transfer of rights and interest in the IP by the assignor to the assignee and if the assignor wants the IP right back, it has to be purchased from the assignee.

In licencing, the licencee has the right to use the IP but cannot use it beyond the conditions of the agreement. In assignment, there is a cessation of interest by the owner in the IP and a complete transfer of rights to the assignee. In India, assignment of IP rights is required to be done in writing under various IP rights acts. 

Corporate governance and ip licensing

Normally, the focus of the Board of Directors is on tangible assets and leveraging them for returns to the company, investors, shareholders, etc. In the new economy where innovations, patents, and processes are proliferating and these intangible assets are invaluable to the enterprise, the Board of Directors is expected to exploit their commercial value and guard them from being misused or infringed upon by outsiders. Good corporate governance with an emphasis on IP assets will lead to enhanced enterprise value.

In Australia Intellectual Property has a competitive advantage as it is tied to brands, trademarks, trade secrets, patents, software applications, copyrighted processes, product designs, etc.

The Board must incorporate in their management agenda IP governance related issues and ensure that the IPRs are properly identified/captured, an IP asset register like a tangible asset register is maintained, and the IPR is protected and properly managed so that the shareholder benefits.

If the Board fails to manage IP assets as per the Good IP Governance  principle under the Australian Corporations Act , it results in a breach of the directors responsibility to discharge their duty of due diligence and adequate care. The officers of the company are held responsible if the company infringes on an IP right if the infringement is done under the direction of the Directors/Officers. The individual directors are required to keep themselves informed of IP related issues so that they can make informed decisions on the risks and strategy of IP.

 In the case of mergers and acquisitions a board that has a strong awareness of IP rights can do due diligence on the IP rights , the risks and the opportunities provided in the mergers, acquisitions or sale. The directors, with the knowledge of IPR, can assess the strengths or weaknesses associated with the IP of the target  enterprise and thereby negotiate the value or warranties of the IP. A properly managed IP portfolio will lead to enhanced enterprise value compared to an enterprise that fails to protect IP assets.

The boards of companies have to be careful about their disclosures when there are IP assets that are part of the company’s assets. The value of IP assets cannot be overstated nor can the potential risks of IP assets be understated, as this may adversely affect potential investors. Disclosures by a public company are a continuous obligation and the wrong picture about the IP assets may adversely affect the company’s outlook.

Corporate governance ensures transparency in  the business dealings of a company and is driven by the Board of Directors; other stakeholders like shareholders, lenders, service providers, suppliers, employees, etc. also impact corporate governance. The key to corporate governance is to communicate to stakeholders the company’s philosophy regarding its policies, its concern for the environment, sustainable development, corporate social responsibility, ethical and transparent behaviour, approach to risk and risk management, among other corporate governance practices. The company formulates policies and controls whose effectiveness is monitored by various committees of the board of directors, like the audit committee, nomination and remuneration committee, independent directors committee, stakeholder relations committee and any other committee the board of directors thinks is required for the functioning and control of its operations.

Most successful companies are seen as good corporate citizens who follow corporate governance principles, as they are seen as taking active participation in areas like the environment: green initiatives), social behaviour (participation in areas of education, health, and community development),  actively disseminating information on their financial performance, about their board composition, giving information about conflicts of interest and risk management, as well as how the company mitigates the  risks and manages the conflict of interest.

The board of directors has a duty to commercialise the IP assets so as to maximise their potential. In this endeavour, the  Board should consider opportunities for licencing or outright sale, joint ventures and strategic alliances of IP rights. The board may also protect its IP rights by enforcing infringers to pay damages. The IP rights are legally enforceable and if a board fails to protect and manage these rights, it may diminish the enterprise value and affect shareholder interest. If an enterprise doesn’t proactively safeguard  its IP rights, then the comparative advantage is diminished and the very existence of the IP rights is threatened. One of the threats is that ex-employees who have gained knowledge can leave the company and join competitors, or they can themselves become unauthorised competitors.

Approaches taken by directors to manage IP assets

Some of the approaches taken by the directors to manage IP assets are as follows:

  1. The Board can direct the management of the company to undertake a complete audit of its IP assets similar to that of tangible assets, thereby identifying the IP assets and categorising them under various heads like patents, trademarks, copyrights, trade secrets, designs, etc. Once the IP assets are identified, it can be assessed whether the IP assets owned are registered and whether they are properly licenced, in case they are the licencees or licencors. The board can then make informed decisions about the IP assets.
  2. Once the IP assets are identified by an audit, the next step is maintaining an IP asset register, as is done in the case of tangible assets. Once the Board of Directors knows about the IP assets, they can make better decisions regarding licencing, sale or assignment of these assets based on their strategic value.
  3. The Board of Directors, knowing the commercial and strategic importance of IP assets and the risks associated with them, has a direct responsibility for the corporate governance of these assets. The IP agenda can be made a standing item on the board agenda, thereby making the management of the company aware of the opportunities and risks.
  4. The board can draft a company wide IP policy, guide and educate the management and staff to implement it and thereby look for opportunities for IP growth, mitigate the risks of infringements, enforce the IP rights of the  company and respect the rights of others.
  5. Boards may nominate IP experts on the board to help them navigate the intricacies of IP rights. However, the board cannot escape their responsibility and they have to remain informed of their IP issues/responsibility.
  6. The board may also form a risk committee, a sub-committee of the board, in case there is a significant IP asset exposure. This committee will look after issues pertaining to IP  protection and IP infringement risk.

Conclusion

Corporate governance is of paramount importance in the running of a company so that stakeholder interests are protected. The role of the board of directors cannot be overemphasised in corporate governance.

In fact, the primary responsibility of the board is corporate governance and  to see that the principles of corporate governance of fairness, responsibility, accountability, transparency and risk management are adhered to by the management and implemented throughout the company.

In the era of innovations and cutting-edge technology, IP and IP rights are the most important topics of which the Board of Directors is aware and ready to deal with. Protecting IP assets, maximising the commercial potential of these assets, safeguarding these assets from infringement and misuse by their competitors, taking action against infringements by way of imposing penalties, etc.

IP licencing and assignment of IP rights is a decision that the board may have to make after weighing the pros and cons. A board may form a sub-committee with an IP expert so that their perspective will help the board make an informed decision.   

References

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