May 1, 2017    5 minute read

Lessons Learned in 25 Years of Corporate Governance Regulation in India

Improving Corporate Governance in India    May 1, 2017    5 minute read

Lessons Learned in 25 Years of Corporate Governance Regulation in India

Corporate directors collectively shoulder the governance burden in a company. It spells trouble for them if the slightest deviation happens. Answerability of directors is constantly under the probing eyes of regulators and busybodies. Non-executive directors, including independent directors, cannot claim immunity from the fact that they are not involved in the day-to-day functioning of the company. Stakeholders expect objective decision making from them. In India, corporate governance works in a different way: beneath copy-book compliance there lies covert decision-making.

A Confused Lot

Corporate directors in India are torn between loyalty to promoters and righteousness. Promoters in India, regardless of how much control they have, rule the roost. The confusion amongst the directors emanates from a lack of perception and analytical abilities. Loyalty takes precedence in the process of decision-making. The confusion also arises from the approach that the directors should take – liberal or conservative. The conservative lot, under pressures of being right, take strong positions overlooking real-world considerations. The conservative approach, at times, leads to loss of business opportunities. The liberal directors take the mantle of a CEO and influenced by anticipated result, take decisions in a rush. They often look at the proposals from promoters’ perspective alone. Both the approaches may turn out to be flawed.

Experiential Corporate Governance

Corporate governance practices emerge out of experience; it is a process of thinking, learning, analysing and re-learning. The promoter’s control over companies may have no impact on decision making if reason takes precedence over all other factors. Governance skills can to a limited extent be acquired through education. However, it is often the case that they are attained through experience.

Over the last 25 years, corporate governance regulations have seen a massive transformation in India from being voluntary to being codified. Here are a few lessons gained over these years:

Survival of Independent Directors

Despite new-look governance regulations, promoters in India still rule the roost. Independent directors need the crutches of promoters to get themselves elected. Even before the election, the selection process is controlled by promoters. The independence of directors is yet to become a reality. Promoter interference continues to play havoc with governance principles. Two top companies in India, considered to be best in governance, had their share of dirty linen washed in public recently. The clash between the promoters and the top managerial person in these two companies continues to be in the news. The governance regulators silently watched these incidents from the sidelines. Promoters have demonstrated that they still call the shots, hardly realising that investor confidence has taken a new dip.

Positive Outlook

Has the outlook of directors evolved over the years? The structural shifts in the board brought about by revamped corporate law has ensured that the independent directors are valued greatly. There is a subtle change in the attitude and thinking of the directors. Directors in India no longer perceive the situation only from a management viewpoint but also in light of the company’s interest as a whole. This positive change in attitude will transform the way the companies are governed provided the directors continue to make their presence felt in the board meetings.

Directors in Indian companies carried an unimpressive record of attending board and committee meetings. In 2012, about one in every five directors (both executive and independent) or 19% of the directors of top Indian companies attend fewer than 75% of board meetings, according to recent analysis by proxy advisory firm Ingovern Research Services. Ingovern analysed the annual reports of companies and found some of the directors did not attend any meetings at all in the financial year of 2012. The codified duties of directors in the new Indian Companies Act has made directors accountable for fraudulent activities apparent through board processes, even if they do not attend the board meeting. Though no recent data is available, the annual reports of listed companies suggest a change for the better is happening.

Perform or Perish

Directors now know that there is no escape from liability if they are not vigilant. Remaining silent is no longer the option. If directors have different views, recording their dissent goes a long way in building a safety net around them in the unforeseen event of governance mishap in the company. Being on the board now translates to greater accountability as more board members become acutely aware of the consequences if mistakes are made.

The business environment over the years has become tougher and competitive. Board governance calls for continuous monitoring and review of business plans. Sickness norms of 100% erosion of net worth, which provided a huge cushion to the companies from prying eyes, are no longer in vogue. The slightest default in financial obligations will make companies face the insolvency resolution process. They are aware that they need to perform or else insolvency and winding-up proceedings may ensue.

Know-All Attitude of Directors

The regulations provide for continuous updating of directors. The directors of Indian companies have little inclination to learn and update themselves. Their know-all attitude prevents them from keeping abreast of all the latest legal developments. This conservative style is no longer effective, yet the ‘experienced’ lot does not feel the need to gain in-depth knowledge of the latest governance regulations. Their lack of knowledge not only works against the company’s business interests but also has all the ingredients of putting them in trouble with regulators at some point in time. It is imperative that directors shun the ‘know-all’ attitude – the sooner, the better.

Beyond Personalities

Companies select independent directors based on previous appointments held. This leaves out a significant number of qualified, competent and able individuals who can be real assets to the company. In their zeal to rope in famed personalities, the real purpose behind the appointment of independent directors has taken a back seat. If a person, however competent and qualified he may be, does not know the promoters personally, he stands no chance of being appointed as an independent director. Equally many independent directors are unsure as to how to approach companies in order to be considered for appointment to the board. Regulators in India have failed to create a model for fair consideration of prospective board members.

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