From succession planning to management compensation, Indian listed firms have a long road ahead

“The price of greatness is responsibility.” Legendary British Prime Minister Winston Churchill said these words at Harvard University in 1943. While Churchill wasn’t speaking about the operation and management of companies, his words do hold as sage advice in terms of corporate governance.

They are even more relevant in the Indian context, given that several firms have plans in terms of listing and going global but are often reluctant to implement corporate governance practices such as disclosures and transparency, board composition and succession planning.

Even companies on this year’s BT500 list have seen their share of problems—be it related to corporate governance (such as at PTC Financial Services, Zee or Adani Enterprises), or issues of cash burn and post-IPO value loss in the start-up sector (such as at Zomato and Paytm). Many reports have highlighted some of these issues. For instance, a recent report by FTI Consulting found that firms on the Nifty 100 Index have an average corporate disclosure score of 6.5 out of 10. Its India Disclosure Index 2023 reveals that nine of these Top 100 Indian firms are classified as corporate disclosure champions, with scores of 9 or above, with Infosys scoring a perfect 10. However, 76 per cent of them do not have independent board evaluation by a third party, while 48 per cent do not have an independent mechanism and metric to track anonymous whistle-blowing.

Similarly, the Indian Corporate Governance Scorecard 2022 by proxy advisory firm IiAS found that the median score of BSE 100 firms fell to 61 in 2022 from 62 in 2021. The maximum score, however, rose to 82 from 80. Amit Tandon, Founder & MD of IiAS, says corporate governance standards are much higher in India than in many other jurisdictions. “Investor expectations have also gone up. This is reflected in our corporate governance scorecard... Our experience is that larger companies by and large have higher standards and the smaller, promoter-driven ones face relatively more governance challenges,” he says.

With a number of measures taken by the government and markets regulator, the Securities and Exchange Board of India (Sebi), over the years as well as higher participation by investors, experts believe there has been an improvement in companies following corporate governance norms. Shriram Subramanian, Founder & MD of proxy advisory firm InGovern Research Services, says there has been a significant improvement in corporate governance practices by companies in the past six to seven years with measures including the Companies Act, 2013, and amendments. “Scrutiny by shareholders is also very high and companies have realised that they cannot get away with bad practices any more,” he says.

Pavan Vijay, Founder of advisory, consulting and law firm Corporate Professionals, concurs that corporate governance has become a more prominent focus because of regulatory changes and increased awareness. “While some companies have made notable improvements, challenges still exist in ensuring uniform adherence to best practices,” he says. Some companies have improved their reporting practices, but more can be done to enhance transparency and accountability, he adds.

The companies act, 2013, has laid out a formal structure for corporate governance in terms of disclosures, filling up of vacancies and periodic holding of board meetings. Sebi, too, has focussed on stricter disclosures for listed entities such as in the area of related-party transactions while the Reserve Bank of India and Insurance Regulatory and Development Authority of India (Irdai) have been keeping a hawk eye on issues in their respective sectors.

A striking aspect has been the rise of shareholder interventions and that has made companies more responsible in their dealings. “Over the years, engagement by institutional shareholders with their investee companies has increased,” says Tandon of IiAS, adding that this is a sign of the market maturing. Institutional investors made up 83.57 per cent of the shareholder vote-share in Nifty 500 companies in 2022, marginally more than the 82.26 per cent in 2021, says an IiAS study on voting data and outcomes.

But many issues are still work in progress, while newer focus areas are emerging as businesses evolve. For instance, start-ups continue to face their own set of problems amidst their thirst for higher growth. Then, companies in traditional sectors still have to work out issues around succession planning, especially in promoter-driven firms, compensation of top officials as well as board composition, with reference to women directors.

“There is no one silver bullet and new areas of change are evolving, such as disclosures for ESG. This is also the first year when companies have to furnish BRSR reports. Another issue that companies still require more work on is compensation. There has to be more disclosure and granularity in the disclosure on compensation to executive directors,” says Subramanian.

For Tandon, a key issue IiAS has been raising is compensation levels of top management. “Promoters should not be able to vote on their own salary. As a general rule, compensation levels should be related to the performance of the company—this link is often broken,” he says.

According to Vijay of Corporate Professionals, gender and ethnic diversity on boards, ethical practices, and whistle-blower protection are other important aspects that need attention and improvement. “Companies will be called upon to adopt an inclusive approach that takes the community, its customers, its employees and its suppliers into consideration when developing the company strategy,” he underlines.

Taking up the issue of succession planning in private banks, RBI has recently advised them to ensure the presence of at least two whole-time directors, including the MD & CEO, on their boards. Meanwhile, Irdai had in June issued guidelines on remuneration of the key managerial personnel in private insurance firms, which was earlier only for top brass such as the MD & CEO and whole-time directors.

While the jury may be out on the extent to which listed firms follow corporate governance norms in letter and spirit, there is agreement that better governed firms tend to see better performance in the market. “But it is difficult to differentiate as to what extent the better market performance of a company is due to governance and to what extent it is due to other factors,” says a senior market expert.

This was also highlighted by the Corporate Governance Score 2022 by IiAS, which said that its assessment shows that well-governed companies (with a score of 60 or more) continue to show better price performance and lower stock beta at a portfolio level. “A few exceptions aside, markets generally reward well-governed companies,” it wrote.

What this means is that despite short-term pain in meeting these norms, companies can gain in the long term by adhering to corporate governance norms.

@surabhi_prasad

The full BT500 List can be accessed here