Governance: On the path of progress

While challenges persist regarding executive compensation and board effectiveness, governance is now firmly on the board's agenda

For eight consecutive years now, we at Institutional Investor Advisory Services India, the proxy firm where I work, have been scoring the BSE100 companies on their governance. I wrote about this in detail in 2017 and alluded to it in the context of the Hindenburg-Adani report last year.  We published the “scores” based on data for FY23 earlier this month. Using this data, it is time to look back at corporate India’s governance practices over the past five years.  

First, is it possible to measure something as fuzzy as governance? The scorecard approach attempts to do just this, by first breaking down the various elements and then assigning it a score. For example, when evaluating a firm’s dividend distribution policy, you first look at whether the company has a policy in place. If so, you look at elements of the policy, for instance, disclosure of a dividend payout ratio or a range. And finally, you look at evidence of adherence to the policy or explanations for non-compliance.

As these elements span across parameters like transparency, board composition, risk management, among others, assigning a number can be challenging because there is an element of subjectivity involved. Using well-established frameworks, helps minimise such subjectivity, but does not eliminate it altogether.

We used the G20-OECD Corporate Governance Principles and scored the BSE100 companies, focusing on four of the six pillars: (1) Rights and equitable treatment of shareholders (2) Role of stakeholders (3) Disclosures and transparency (4) Responsibilities of the board. This scorecard was developed jointly with the International Finance Corporation and BSE. A revision to our methodology was made in 2022 and following the update to the G20-OECD Corporate Governance Principles in 2023, another refresh is due. 

The findings are summarised below: 

The overall scores have been moving up: The highest, median and lowest scores have all incrementally moved up. The incremental improvement heeds the adage that “governance is a journey, not a destination”.

All-round improvement: The number of companies scoring well on the Indian Corporate Governance Scorecard (Leadership and Good, the top two buckets) has increased significantly (from 45 in 2019 to 64 in 2023), despite tighter marking criteria.

Transparency & disclosure: Disclosure standards have become more stringent, leading to greater transparency. This includes publishing sustainability reports, making policies accessible, and improving communication with stakeholders.

Investor engagement: Board meeting and annual general meeting attendance by board members has improved; there is increased engagement between companies and investors. 

Regulation & enforcement: Regulators such as the Securities and Exchange Board of India have played a crucial role in driving better governance through stricter disclosure requirements and enforcement measures.

Family-owned businesses: The dominance of family in businesses can hinder true board independence and accountability. However, family-owned businesses overall, for the first time, scored higher than MNCs and institutionally-owned firms, with public sector units anchoring the scores.

Board effectiveness: The category of “Responsibilities of the Board” has shown the least improvement, with boards often remaining passive on governance issues.

Executive remuneration: Alignment of executive pay with company performance seems to be declining.

Investor activism: Investor activism remains limited, with most cases arising when promoters lose control.


Table: Progress across select parameters 

	2019	2023
Companies with more than 50% board independence (with a tenure of less than 10 years)	25	30
Boards that have separated the roles of Chairperson and CEO	57	68
Companies with at least one Independent Woman Director	97	97
Board with a diversified and comprehensive set of skills	41	62
Companies where all board members have attended at least 75% of the board meetings held over the immediate past three years	60	90
Companies where all board members attended the previous AGM	13	64
Companies where executive pay was in line with revenues and profits over three years	48	38
Companies where CEO’s variable pay was at least 50% of overall pay and less than 5% of profits	55	59
Companies that have a publicly disclosed conflict of interest policy for employees	49	69
Related party transaction policies that prohibit interested directors from participating in discussion and voting	44	56
Companies with whistle-blower policies that extend to all stakeholders, including employees, customers, and suppliers	34	43
Companies that are spending at least 2% of profits on CSR	75	74
Companies that are impact assessments of their CSR spends	32	54

 

Although there are challenges, particularly regarding board effectiveness, executive compensation, and the role of independent directors in family-owned businesses, the overall governance of Indian listed corporations has improved. This is due to a combination of factors, including stricter regulations, increased investor focus on transparency, and a growing recognition of the link between good governance and market performance. The biggest change of course is that governance is now central to a board’s conversations and firmly on the agenda. This alone will ensure progress.

The writer is with Institutional Investor Advisory Services India Ltd. The views are personal. @AmitTandon_in