India Inc fails 'board' exams

Only 13% of Nifty and 21% of Sensex companies have highly effective boards of directors, shows a study by Standard Chartered

India Inc’s big boys, the ones that make the benchmark indices, don’t score very high on board effectiveness. How well shareholder interests are protected, when an average 50 per cent of the shareholding is controlled by the promoters, is held to determine this. Only six companies that are part of the benchmark indices were found to have very effective boards, according to an analysis done by Standard Chartered Securities.

The firm conducted a study of 80 companies. These included 46 of the 50 companies making up the Nifty, and 28 of the Sensex-30 firms. Companies on the two indices account for more than half the combined value of all listed companies in India available for public trading. The six companies with effective boards constitute around 13 per cent of Nifty companies and 21 per cent of the Sensex ones.

StanChart’s report on the study, titled, ‘Board independence — It matters,’ noted the median promoter shareholding among the Nifty companies was 50 per cent. “A strong and effective board is, therefore, critical in protecting and enhancing shareholder value,” said the report, authored by Rahul Singh, Saurav Anand, Sanjay Singh and Pratik Biyani.

The benchmark index companies in the high effectiveness list are Tata Motors, Housing Development Finance Corporation, ICICI Bank, Axis Bank, Infosys Technologies and Dr Reddy's Laboratories.

Shriram Subramanian, managing director of InGovern Research Services, said an independent board can provide depth to a company’s strategic decision making, which could be missing in promoter-driven companies.

“One would think that collective wisdom is better than individual wisdom. In a promoter-driven company, the individual voice can drown out the collective voice…There is anecdotal evidence and some global studies which have shown that an independent board can help the valuations of a company. One needs to look at whether dissent is tolerated and if the board is truly independent in terms of the exchange of ideas,” he said.

“World over, valuation is linked to governance. Companies enjoy better valuations because people have more faith in them,” said J N Gupta, founder and managing director of Stakeholders Empowerment Services.

The study looked at factors such as independence of the directors, board diversity and whether key board committees such as audit and compensation are run by independent directors. Within sectors, those with an export focus seemed to score highly on effectiveness. Companies from the information technology and pharmaceutical sectors were found to have boards more effective than the average. Financials also did well.

Public sector companies scored low, primarily on account of the combined chairman and chief executive officer roles. Those with one person performing both roles face a conflict of interest, since the CEO is supposed to report to the chairman.

Companies with highly effective boards were also found to have better earnings, as well as return ratios.

“There seems to be a strong association between the scores and the three-year median compounded annual growth rate in earnings per share (FY11-14) of each of the score buckets. While there are multiple other factors driving earnings for any company, the quality of the board appears to have some correlation with earnings,” said the report. “While the correlation with the absolute return on equities (five-year median FY10-14) is weaker, there is a subtle trend in at least the buckets with outlier scores (i.e. < 5.0 and >8.0). This is also evident in the RoE accretion during FY10-14, which shows a positive gain only for one segment with the highest board scores; the rest of the universe has seen RoE decline during the period,” it added.