Strengthening governance practices remains focus of India Inc

This year too we saw PSUs being laggard in a lot of areas – including remaining non-compliant with even the minimum regulatory standards. A few PSU boards have less than the minimum number of independent directors, with a few not even having an independent director

Post Covid-19 crisis, corporate India continued to focus on strengthening corporate governance practices as expectations from investors, lenders and regulators kept increasing.

This is reflected in the maximum score, which has increased to 82 in 2022 from 80 in 2021. The median score is, however, almost unchanged

at 61 in 2022 from 62 in 2021, on the back of a tightened scoring key.

Institutional Investor Advisory Services (IiAS) released the seventh edition of its assessment of Corporate Governances Scores of the S&P BSE 100 index constituents. The S&P BSE 100 constituents account for 68 per cent (as on March 1) of total market capitalisation, therefore, the results of the assessment are a fair representation of market practices.

The framework for the Indian Corporate Governance Scorecard was developed over 2015 and 2016, jointly by International Finance Corporation (IFC), a member of the World Bank Group and Bombay Stock Exchange (BSE) and IiAS. The scorecard is based on the widely accepted G20/OECD principles of corporate governance. The framework looks at the global best practices but contextualizes it for the Indian nuances -making it far more relevant for our markets.

The framework was revised on April 1 last year after an extensive market consultative process. The scorecard now assesses companies on a set of 66 questions against 70 – the questions were duly reviewed based on changes in regulations and the changing practices in the Indian markets, benchmarked against global best practices. The threshold for the leadership category was also raised to 75 from 70.

A consequence of this stringent scoring has been that this year 16 companies had a score of more than 70 compared to 20 in the previous year. Also, with the increase in the leadership threshold, we have only six companies making the cut this year compared to all 20 in the previous year. The total number of companies scoring above 60 (good+leadership categories) decreased to 52 from last year’s 57, but still above the half-way mark, suggesting that companies continue to perform well on this scorecard.

Talking to Bizz Buzz, Amit Tandon, MD & CEO, IiAS, says, “In undertaking this exercise, we, at IiAS, have put a numerical score on something as fuzzy as governance.”

Importantly, it moves the conversation a step forward for complying with rule of the law to adhering to principles. And in doing so it looks at the practices that companies employ, he said.

Companies are now moving from G to ESG. The new disclosure under the Business Responsibility and Sustainability Report requires companies to make tangible disclosures on their ESG performance, he added.

Given that the data is structured and the format of disclosure is standardised, the regulator expects to create a set of comparable data that will help companies benchmark themselves against others.

“Markets value good governance. Our assessment shows that well governed companies tend to show stronger price performance and lower beta at a portfolio level. A few exceptions aside, markets generally reward well-governed companies”, said Hetal Dalal, President and COO, IiAS

Independent directors continue to be the pillars of good governance and for protecting minority shareholders. Hence, the regulatory focus on the appointment and reappointment of independent directors. Similarly, the changes in the related party transactions aimed to bridge regulatory loopholes, especially with transactions through subsidiaries, came with a bigger role for the Audit Committee of the board. With an absolute threshold of Rs 10 bn, several more transactions now need shareholder approval. While most related party transactions remain largely operational, these did highlighted how often promoter-controlled entities do business with listed companies.

This year too we saw PSUs being laggard in a lot of areas – including remaining non-compliant with even the minimum regulatory standards. A few PSU boards have less than the minimum number of independent directors, with a few not even having an independent director. This has been a concern over the past several years, but regulatory enforcement on PSUs has been weak. For a large part of the regulatory requirements on corporate governance, the government has created an exception for PSUs in the regulation itself. However, in the case of board composition norms, the rules remain uniform but PSUs do not meet the prescribed standards.

Governance in start-ups has becoming a concern for investors. With most of these companies losing value post-IPO, with their founders and a set of pre-IPO investors having promoter-like rights but none of the restrictions. Market pressures are now compelling these companies to revisit their cash-burn disruptive models and focus on turning profitable.