New IPO companies fare worse than index ones in corporate governance: Study

Poor governance has been a drag on returns for firms, finds study

Companies which have recently come out with their initial public offers (IPOs) have worse corporate governance scores than those in key benchmark indices revealed an annual examination of governance standards across companies. 

Recently listed companies scored 54, compared to 58 for the S&P BSE 100 companies and 61 for companies in the S&P Sensex companies, showed the Indian Corporate Governance Scorecard report brought out by governance firm Institutional Investor Advisory Services India Limited (IiAS). The framework was developed in association with Asia’s oldest exchange BSE and the International Finance Corporation (IFC). The initiative had financial support from the government of Japan. 

The study re-evaluated 50 companies which listed between April 2015 and March 2017. 

“The institutionalization of governance practices has led to greater stability of scores for the larger listed companies. IPO companies have not been able to hold ground – median scores for IPO companies declined to 54 from 55 last year, with the lowest score being a mere 29. Nonetheless, the study shows, the markets have rewarded the more stable and better governed companies,” it said. 

It noted that issues remain in IPO companies where there seems to be a need to institutionalise governance practices. 

“In IPO companies, severe issues were reported by the auditors in some of the companies. As a result, the number of companies in which auditors have raised concerns on the financial statements has increased to 32% from 24% in 2018,” it said. It has reduced for the S&P BSE 100 companies from 35 per cent previously to 25 per cent this year. 

The score is developed on the basis of factors including treatment of shareholders, disclosures and transparency. The role of the board and stakeholders is also considered. Interestingly, public sector companies have the lowest scores amongst different promoter groups in the S&P BSE 100. Such companies scored 52, compared to 60 for private promoter-led companies. Widely held companies scored higher at 62. Multinational companies had the highest score at 63. Lack of adequate independent board representation and lack of transparency on issues including related party transactions are among the reasons which are said to be weighing on the governance score of public sector companies. 

There are tangible returns for firms which have better governance practices, noted the report. It noted that those with a governance score of 60 or more, which fall under the well-governed category, have outperformed the rest over periods of two years and three years. 

“This analysis is not a back-testing of current scores, but an assessment of companies scored in our earlier studies. Therefore, the assessment has predictive value. Essentially, well-governed companies will deliver better market returns going forward,” it said.