From board permanency to audits, India Inc lags in corp governance: IiAS

Under proposed Sebi norms, firms must get shareholder nod at least once in 5 yrs for each board seat so that promoters aren't able to retain control after losing dominant shareholding

Nearly 30 per cent of the top 100 companies have permanent board seats, a set up that the market regulator plans to eliminate to strengthen corporate governance at listed firms.

Under the proposed norms, companies will have to get shareholder nod at least once in five years for each board seat. The policy change is designed to address concerns about promoters retaining control even after losing their dominant shareholding.

Proxy advisory agency Institutional Investor Advisory Services (IiAS), in its report on corporate governance, notes that as the board is compliant with such promoters, who seldom face pressure from their peers. Ultimately, it up to the investors to fight for a change in board and management.

“Under these circumstances, in order for investors to effect change, they need to seek the removal of the director. This is a far more difficult battle than simply voting against a director's reappointment,” said the report.

Experts said the ratio of companies having promoters with board permanency may be higher for the broader market. Another matter of concern is succession planning in promoter-driven companies.

“One of the biggest challenges in such a genre (promoter-led companies) is succession management--they never get it right. Part of the reason is that succession is very often not decided in the boardroom but in the living room,” said Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas, in an address on corporate governance in Mumbai.

For promoter-led companies, Shroff added that while there is a Raja-Praja mindset, it has to be more of a Gandhian trusteeship model.

Only 47 per cent of the companies have a succession plan for the board of directors and senior leadership, according to the IIAS report. However, this is an improvement from 34 per cent in 2021.

The report also highlights issues peculiar to new-age companies.

For instance, at non-promoter-led companies, special rights are given to a set of investors, which could be prejudicial to the interests of other shareholders. In newly-listed startups, pre-IPO investors have board nomination rights without any shareholding thresholds.

“More than half the BSE 100 companies have either given out special rights to a set of stakeholders or their charter documents are not available in the public domain for investors to be able to understand these arrangements,” noted IiAS.

In a recent consultation paper, Sebi had proposed measures to address some of these concerns. (see link: https://mybs.in/2cCQjqn)

Another area in which proxy agencies are pushing for greater transparency is audit quality.

In 2022, only 23 per cent of the boards provided information about the independence, competence and experience of the statutory auditors. The figure was as low as eight per cent in 2021.

This disclosure’s significance comes in the light of the recent battle between Adani group and US-based short seller Hindenburg, where the contention was that it had a signing partner with no significant experience.

India Inc also falls short on gender diversity at the board level. The median board representation of women in the BSE100 as of December 31, was about 16 per cent. Over 80 per cent of the companies’ board had less than 30 per cent women.

The report by IiAS on corporate governance highlights other issues such as evaluation of performance, disclosures, executive payments to policies on related party transactions, among others.

While only 31 per cent of the companies had conflict-of-interest policies that encompassed all stakeholders and were not limited to employees, only 51 per cent had policies on related-party transactions that prohibited interested directors from participating in discussion and voting on such transactions.