Business Standard

Governance: On the path of progress

- THE OCCASIONAL ASIDE AMIT TANDON The writer is with Institutio­nal Investor Advisory Services India Ltd. The views are personal. @Amittandon_in

For eight consecutiv­e years now, we at Institutio­nal Investor Advisory Services India, the proxy firm where I work, have been scoring the BSE100 companies on their governance. I wrote about this in detail in 2017 and alluded to it in the context of the Hindenburg-adani report last year. We published the “scores” based on data for FY23 earlier this month. Using this data, it is time to look back at corporate India’s governance practices over the past five years.

First, is it possible to measure something as fuzzy as governance? The scorecard approach attempts to do just this, by first breaking down the various elements and then assigning it a score. For example, when evaluating a firm’s dividend distributi­on policy, you first look at whether the company has a policy in place. If so, you look at elements of the policy, for instance, disclosure of a dividend payout ratio or a range. And finally, you look at evidence of adherence to the policy or explanatio­ns for non-compliance.

As these elements span across parameters like transparen­cy, board compositio­n, risk management, among others, assigning a number can be challengin­g because there is an element of subjectivi­ty involved. Using wellestabl­ished frameworks, helps minimise such subjectivi­ty, but does not eliminate it altogether.

We used the G20-OECD Corporate Governance Principles and scored the BSE100 companies, focusing on four of the six pillars: (1) Rights and equitable treatment of shareholde­rs (2) Role of stakeholde­rs (3) Disclosure­s and transparen­cy (4) Responsibi­lities of the board. This scorecard was developed jointly with the Internatio­nal Finance Corporatio­n and BSE. A revision to our methodolog­y was made in 2022 and following the update to the G20-OECD Corporate Governance Principles in 2023, another refresh is due. The findings are summarised below:

The overall scores have been moving up: The highest, median and lowest scores have all incrementa­lly moved up. The incrementa­l improvemen­t heeds the adage that “governance is a journey, not a destinatio­n”.

All-round improvemen­t: The number of companies scoring well on the Indian Corporate Governance Scorecard (Leadership and Good, the top two buckets) has increased significan­tly (from 45 in 2019 to 64 in 2023), despite tighter marking criteria.

Transparen­cy & disclosure: Disclosure standards have become more stringent, leading to greater transparen­cy. This includes publishing sustainabi­lity reports, making policies accessible, and improving communicat­ion with stakeholde­rs. linvestor engagement: Board meeting and annual general meeting attendance by board members has improved; there is increased engagement between companies and investors.

Regulation & enforcemen­t: Regulators such as the Securities and Exchange Board of India have played a crucial role in driving better governance through stricter disclosure requiremen­ts and enforcemen­t measures.

Family-owned businesses: The dominance of family in businesses can hinder true board independen­ce and accountabi­lity. However, family-owned businesses overall, for the first time, scored higher than MNCS and institutio­nally-owned firms, with public sector units anchoring the scores.

Board effectiven­ess: The category of “Responsibi­lities of the Board” has shown the least improvemen­t, with boards often remaining passive on governance issues.

Executive remunerati­on: Alignment of executive pay with company performanc­e seems to be declining.

Investor activism: Investor activism remains limited, with most cases arising when promoters lose control.

Although there are challenges, particular­ly regarding board effectiven­ess, executive compensati­on, and the role of independen­t directors in family-owned businesses, the overall governance of Indian listed corporatio­ns has improved. This is due to a combinatio­n of factors, including stricter regulation­s, increased investor focus on transparen­cy, and a growing recognitio­n of the link between good governance and market performanc­e. The biggest change of course is that governance is now central to a board’s conversati­ons and firmly on the agenda. This alone will ensure progress.

 ?? ??
 ?? ??

Newspapers in English

Newspapers from India