'Treat compliance not as cost, but investment'

Corporate India would have to look at any increase in the cost of compliance - brought about by changes in the company law, Sebi's listing agreement, and stricter corporate governance codes - as an investment for creating sustainable businesses, says Nick Sutcliffe, executive director, Asia Pacific, The Conference Board.

The Conference Board, a US headquartered not-for-profit organisation that undertakes research and disseminates knowledge about management and marketplace, recently announced the setting up of The Director's Collective, in association with professional services firm KPMG, law firm Khaitan & Co, and assessment and recruitment company Russel Reynolds. The collaborative forum will address complex demands placed by the Companies Act, 2013, on board members and senior executives who have governance and compliance responsibilities.

"We created The Director's Collective to assess - where India excels, what could the rest of the world learn from India, what can India learn from around the world, and how to apply that to the country," Sutcliffe says. To start with, The Director's Collective published a Handbook on Corporate Governance in India: Legal Standards and Board Practices, authored by Afra Afsharipour, a professor of law at University of California, Davis School of Law.

Afsharipour says the handbook looks specifically at legal standards (in corporate governance) applicable to Indian companies. Apart from providing a historical context of corporate governance reforms in India, it offers an overview of different aspects of the latest company law, and its impact on compliance and governance standards and practices in a company. "The idea is to make this the basis for India-specific data gathering and research that could be useful to corporate directors," she adds.

On the check-the-box approach to compliance and governance prevalent among many companies in India, both Sutcliffe and Afsharipour are of the view that the culture of governance in a company is set by the board.

"Any improvement in compliance level and governance standard is not a process-change, but a cultural change," notes Sutcliffe. Like any change management process, unless there is buy-in from a cultural point of view, and an employee point of view, improvements in the level of compliance would not happen, he adds.

According to Afsharipour, one of the reasons why people adopted the tick-the-box approach was because they did not have access to information. "In India, information about best practices among competition is largely anecdotal, and not comprehensive or systematic."

Mritunjay Kapur, partner, KPMG, points out that in the previous version of company law, there was very little of the consequence management built in the Act itself with respect to prosecution and fines. "The new Act has a lot more teeth, which is a big differentiator."

On compliance cost of corporate India going up, Sutcliffe is of the view that Indian companies would have to undertake a change in mindset from treating these as costs to one that is an investment for sustainability of the business.

Afsharipour points out that even in the US, companies had a similar complain following implementation of the Sarbanes-Oxley Act of 2002. "The investments were significant at the beginning. However, these companies are now saying that they have seen returns over investment. They are able to identify problems much earlier, attract better talent, and improve outreach to their customers," she says.

However, Sutcliffe feels that big Indian companies will have to take responsibility to create an environment where compliance, governance and social responsibility are seen as the right things to do. "The change has to come top down. Managing directors, chairperson, directors around India not only have to drive compliance and governance in their own companies, but also have to mentor small and mid-sized companies in best practices," he adds. Afsharipour points out that for mid-sized and smaller companies, implementation is going to be a significant challenge.

To facilitate this change, The Director's Collective plans to build a portfolio of member companies in India who will act as an advisory for governance-related research. "To meet the training, learning needs of corporate India, The Collective will create forums for directors, company secretaries and chief legal officers to engage each other and learn how they are dealing with different compliance and governance-related issues facing the industry," says Sutcliffe.