Business Standard

Corporate governance 2014-15 in retrospect

Most companies are not yet ready to adopt best practices and comply with provisions only in letter, not spirit

Asish K Bhattacharyya 

Asish K Bhattacharyya

One year has passed since the promulgation of the Companies Act 2013 (not all sections) and announcement of the revised clause 49 of the Equity Listing Agreement (Sebi code of corporate governance). Have corporate governance practices changed during this period? My impression is that they have not changed much. Most companies are not yet ready to adopt best global practices. Their actions during the year demonstrated their apathy to comply with provisions of the Companies Act and clause 49. They complied with the provisions only in letter, not spirit.

The case in point is the separate meeting of independent directors. Anecdotal evidence suggests that many companies have complied with the provisions only in letter and not in spirit. In some companies, including government companies, the separate meeting of the independent directors was over in less than 30 minutes and evaluation of the board, chairperson and individual directors was completed within that period. This shows that the promoters/managers of companies do not see value in board evaluation. Independent directors either could not induce the promoters/managers for facilitating holding of the separate meeting or they also hold the same view as that of promoters/managers. This is bad news for shareholders.

During the year business newspapers reported the apathy of some companies in providing e-voting facilities to shareholders. Some large companies, including a leading public sector bank, did not provide e-voting facility in extra-ordinary general meetings (EGM) and court-convened special meetings. Without getting into the debate on whether legally e-voting facility is to be provided in EGMs and special meetings, it can be concluded that promoters/managers do not want shareholders to participate in decision-making even in those areas that are reserved for shareholders by law. This is an example of poor corporate governance.

Last minute appointments of women directors by companies is yet another example of compliance of law in letter but not in spirit. Business newspapers reported that most of those who are appointed to the Board are relatives of the promoter of senior executives. Enough time was given to companies to search for a right woman director.

The search for a woman director might be more difficult than searching for a male director due to inadequate number of women who fit the job. But was there a serious effort by companies? The answer is no.

Otherwise, companies could induct women with potential to be a Board member and mentor them. I am not saying that relatives of promoters or senior executives are not competent. But the purpose of appointing a woman director is to bring diversity to the Board. It is difficult to assume that a director, who is a relative of the promoter or a senior executive, will bring independent perspective and views in the Board.

Quite likely they will act subserviently to the promoter. Appointment of a woman as independent director might serve the purpose better.

Theoretically, the cost of capital to the companies, which have adopted good corporate governance practices, should be lower than that of others. This is so because investors perceive higher risk in investing in companies where the quality of corporate governance is poor. However, practically this might not happen.

Investors cannot assess the quality of corporate governance from outside except when a serious corporate governance issue in a company comes in public. Disclosures fail to reveal the level of seriousness with which the company has complied with the provisions of the Companies Act 2013 and Clause 49. Therefore, investors fail to distinguish between companies that have adopted the 'tick-box' approach from those which have complied with the legal provisions with seriousness. Consequently, if most companies adopt the 'tick-box' approach, investors assume that all the companies adopt the 'tick-box' approach. As a result, the cost of capital is likely to remain almost the same for all the companies in the same industry, except those few, which could build the reputation that they follow good corporate governance practices. This is one reason why promoters/managers do not see value in good corporate governance. The other reason is the lack of independence and competence of independent directors.

During the year 2014-15, Boards continued to function in the same way as they were functioning earlier. Independent directors failed to bring any meaningful outside perspective in boardroom deliberations. Neither independent directors nor promoters/ managers were interested in directors' training. As a result, directors continued to lack understanding of business model and business environment. Boards spend time in discussing routine issues and listening to power-point presentations by the management. Long power point presentations kill the time and leave little time for meaningful discussion. Independent directors ask some questions, but hardly probing ones. Strategic issues are not discussed in the Board. Board is informed of the strategy and no serious discussion takes place.

I am hopeful that some promoters/managers will appreciate the value of an empowered Board. Institutional investors will lead shareholder activism. Things will change in 2015-16.

Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy

First Published: Sun, April 05 2015. 21:34 IST