Monday, April 30, 2012

Corporate Governance Survey

Despite developments in regulation of corporate entities around the world and India’s own share of scandals in recent years, corporate governance continues to be a matter of “check the box” or a set of compliance requirements, with only limited emphasis on the spirit of governance. This has been underscored in a recent corporate governance survey The India Board Report 2011 prepared jointly by AZB & Partners, Hunt Partners and PWC. The key findings are summarized in the report as follows:
Corporate governance is a subject that attracts a lot of media attention, especially just after a scandal. This usually prompts governments and regulators to appoint committees to review and change laws. After a while, the hype fades and it’s back to business as usual.
Regulation only ensures compliance. Unfortunately, compliance does not equal commitment to corporate governance. This has been one of the key findings of the third edition of our biennial India Board Report - 2011. Clause 49 of SEBI’s listing agreement has been widely praised, in terms of the standards of corporate governance that it sets. However, only 38% of the respondents felt that it significantly contributed to improving governance!
There are other indications as well. More than half the respondents pointed out that their boards did not have a formal process to evaluate their effectiveness. Two-thirds of the independent directors surveyed said that the roles and responsibilities of non-executive directors were not defined clearly. Around 50% of them felt that the time spent by the board in completing the agenda of the meeting was inadequate. 
The findings of the survey are also discussed in a report in the Mint.
Part of the findings may be attributed to the fact that the emphasis of governance norms lately has been to adopt a voluntary approach. In addition to Clause 49 of the listing agreement that lays down the basic norms, the Ministry of Corporate Affairs’ Corporate Governance Voluntary Guidelines of 2009 set out best practices to be adopted by companies on a voluntary basis. However, the proposed approach under the Companies Bill, 2011 is vastly different as it seeks to impose mandatory norms of governance on companies. As and when the Companies Bill is enacted into legislation, it is likely that it would have a significant impact on the manner in which companies approach matters of governance.


Mandar Kagade said...

I think given the results of the survey ought to lead us all stakeholders to think about corporate governance in "contractual" terms between the owners and the managers-controlling shareholders at the very least, rather than as regulatory issue. By "contractual" I mean, an issue to be dealt with dynamically through shareholder monitoring of corporate actions that the former will enforce through Courts (as opposed to the regulator laying down prescriptions upfront and then the constituents following the same by box-ticking). A case in point being the recent TCI- Children's Investment Fund initiative against Coal India Boards. Institutional investors like Mutual Funds could be great at monitoring their portfolio companies if the prudential limits on investments could be removed. More skin in the game would mean they would vote at the ballot rather than vote with their feet when there are corporate governance issues in a portfolio company. Compensation -alignment reforms intra-fund would also alter the incentives for governance activism. Interestingly, analysts like Veritas, Credit Suisse are taking the lead in exposing governance lapses more recently.

Bedashruti said...

Isn't the situation the same in Singapore? Rule 1207(10) is a classic example - it created a much needed re-think on the adequacy internal controls. But was the focus on the spirit of good gevernance?