Governance: On the path of progress

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.