Corporate Governance Concerns in India

Corporate Governance Concerns in India

By:

Vijay Sardana

Some of the well-known leading companies in real-estate, pharmaceuticals, steel, infrastructures, financial services, healthcare, FMCG, brokerage firms, banks, software companies, commodity companies, etc are facing both regulatory challenges, bashing from investors and consumers due to poor corporate governance. 

In many cases their directors and senior managers are facing litigation including imprisonments, some are out on bail, others have applied for anticipatory bail many are denied starving aboard and under constant surveillance and in the worst situation, some of them have even committed suicide.

It is important to know that once upon a time they all were big names and favourite guests of industry associations and on media and were considered as celebrities. All these shattered because they refused to accept their responsibility as good corporate citizens and violated corporate governance norms. Imagine their condition of their families and well-wishers in society and in personal life. So, the damage is wide and deep and in today's’ hyper-connected world difficult to recover from stigma.

Why these growing corporate Governance issues are more worrying?

Everyday bad corporate governance is making headlines. Some of the main issues are:

·      Conflict of interests of the board of directors

·      Unauthorised Diversion of funds

·      Manipulation of assets and balance sheets

·      Unauthorised Related party transactions

·      Using corporate resources for personal gains

·      Violation of regulatory provisions

·      Violation of mandatory laws

·      And there are other reasons as well.

Why directors ignore corporate governance norms and what they get out of this?

Many say that greed of promoters and top management is the major reason for mismanagement, others call it ignorance or lack of understanding of corporate governance among the board of directors. The fact is whatever is the reason, implications are bad for all involved in running the company and their stakeholders.

In my view, the challenge of achieving a faster speed in transport systems is an efficient braking system for safe driving, it is not the lack of a powerful engine. Similarly, the frequency of corporate frauds and governance failures indicates that business leaders have invested a lot in business expansion but somewhere they ignored to align their practices with corporate governance norms. Therefore, achieving good governance and ensuring the results of such governance practices continue to remain one of the top priorities of all regulators and all stakeholders even today.

Issues affecting corporate governance practices in India:

1. The composition of the Board of Directors:

Too much weigh on one side can sink the ship. Careful and Calibrated designing of the ship is vital for a long and safe voyage.  The law requires a healthy mix of executive and non-executive directors and appointment of at least one woman director for diversity. There is no doubt that a capable, diverse and active board would improve governance standards of a company to a large extent.

The biggest challenge lies in mindset, i.e. ingraining governance in corporate cultures so that there is improving compliance "in spirit". Most Indian companies tend to only comply under pressure that too on paper.

Board appointments are still by way of “comfort factors”. Promotors do not want people on board who can ask uncomfortable questions or seek transparency.  In many companies, even CEOs and MDs are also appointed based on the comfort factor. It is common for friends and family of promoters (a uniquely Indian term for founders and controlling shareholders) and management to be appointed as board members.

Whenever you see a high staff attrition rate or professional senior managers leaving companies frequently, please evaluate the board and corporate governance standards of the company, you will find some interesting correlation.

2. Performance Evaluation of Directors

Growing incidences of poor corporate governance standards in many listed companies have forced authorities to look at this issue seriously. Now there is a demand to evaluate the performance of directors as per the existing legal framework in India.

The Companies Act, 2013 and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR”) contain broad provisions on Board Evaluation i.e. evaluation of the performance of:

(i)            the Board as a whole,

(ii)          individual directors (including independent directors and Chairperson) and

(iii)        various Committees of the Board.

The provisions also specify the responsibilities of various persons/committees for the conduct of such evaluation and certain disclosure requirements as a part of the listed entity's corporate governance obligations.

In order to convey the seriousness of the issue, in January 2017, SEBI, India's capital markets regulator, released a 'Guidance Note on Board Evaluation'. The guidance note covers all major aspects of Board Evaluation including the following:

a.   The subject of Evaluation i.e. who is to be evaluated;

b.   The process of Evaluation including laying down of objectives and criteria to be adopted for evaluation of different persons;

c.   Feedback to the persons being evaluated;

d.   Action Plan based on the results of the evaluation process;

e.   Disclosure to stakeholders on various aspects;

f.     The frequency of Board Evaluation;

g.   The responsibility of Board Evaluation and

h.   Review of the entire evaluation process periodically.

For performance evaluation to achieve the desired results on governance practices, there is often a call for results of such evaluation are made public. As we all know that evaluation is always a sensitive subject and public disclosures may run counter-productive. That is why companies avoid this. That is why now corporate laws are giving too much attention to the role of independent Directors and the performance of the board. Afterall some have to be accountable for the public interest.

3. True Independence of Directors is vital

Appointment of Independent directors with many new powers was supposed to be the biggest corporate governance reform. However, 15 years down the line, it is sad to say that independent directors have hardly been able to make the desired impact. Due to this, the regulator on its part has, time and again, forced to make the norms tighter and introduced a comprehensive definition of independent directors, defined a role of the audit committee, independent directors committee, etc.

Unfortunately, most Indian promoters avoid detailed disclosure to the board and design a checklist and follow “tick-the-box” way out of the regulatory compliance requirements. This is clearly visible when even auditors failed in doing their proper auditing and involved in window dressing work.

The independence of such promoter appointed independent directors is questionable because of various conflicting interest as it is unlikely that they will stand-up for minority interests against the promoter.

Despite all the governance reforms, the regulator is still found wanting. We must look at how Consitution of India is formed. Why various pillars of the democracy were kept independent? Perhaps, the focus needs to shift to limiting promoter's powers in matters relating to in independent directors.

The way forward:

As far as structural and regulatory changes are concerned, India has witnessed several enactments in the form of the Companies Act, 2013 and SEBI's listing obligations and disclosure requirements regulations, which have contributed significantly in strengthening governance norms and in increasing accountability by way of disclosures, but desired results are still not coming.

For achieving desired results, it is important that regulators must study the pattern and trends in corporate frauds and regulatory measures should be modelled based on the practices and business environment in India. To state the obvious, this should be coupled with the board and the promoters' embracing such reforms – in form and spirit.

Innovative solutions are the need of the hour – for instance, rating board diversity and governance practices and publishing such results or using performance evaluation as a minimum benchmark for director appointment.

Based on your corporate experience, if you have any suggestions, please do share.

About the Author:

The author is IFC trained Corporate Governance Board Leadership Trainer; Member, Commodity Derivatives Advisory Committee of SEBI; Legal, Commercial & Investment Advisor & Arbitrator; Independent Director on various Boards including PSU & Member of Expert Committees.

Email: sardana.vijay@gmail.com