The worrying state of corporate governance in India

Despite reforms, corporate governance is still mostly an anathema for companies

The exit of Jet Airways chairman Naresh Goyal puts emphasis on corporate governance (or the lack thereof) in India yet again. He could have brought in his own money or exited before it was too late. But he decided to delay it, as long as he could, putting the interests of all other shareholders in jeporady.

So why is this an issue of corporate governance?

Corporate governance pertains to internal means through which corporations are operated and controlled.

It essentially means that there needs to be coherence and co-operation between various stakeholders on solving issues, thereby contributing to protecting the investor and minority interests.

The better the clarity between the board of directors and the management, the easier it becomes to sort things out.

Things can, however, go south very quickly when you have people acting to further personal interests at the cost of the company’s shareholders

Take the example of Satyam Computers where, in 2009, Chairman B. Raju wrote a letter to his company’s shareholders, admitting that close to 94% of the cash on books was fictitious.

The reason for him cooking the accounting books was that since promoters held a minority stake, any poor performance by the company would leave him open to a takeover attempt. A hunger to maintain one’s shareholding resulted in a Rs.7,000 crore scam

Over the years, the downfall of giants such as Enron and Worldcom has led to increasing significance on corporate governance standards. The same has been true for India. Enforcement and effectiveness of such reforms, however, is a different matter.

A lot of committees

With the rising instances of conflicting interest, the Securities Exchange Board of India (SEBI) has set up several committees such as the Naresh Chandra committee and Narayana Murthy committee.

These committee recommendations have led to the setting up of an audit committee, a stakeholder-relationship committee, and a risk-management committee.

Although they help in simplifying the distribution of power between the board of directors and the management, it has certain drawbacks too.

Corporate governance in India has become synonymous with the appointment of independent directors. While it is mandatory to appoint independent directors into the board for a more objective approach towards crucial issues, the independent directors are incentivized based on profits which zeroes down the whole purpose of appointing them.

If their compensation is linked to profits, it will lead to a bias wherein they would want the company to perform well. In order to deal with this matter more stringently, the Uday Kotak committee was set up. (are seeing a pattern here?)

The Kotak committee submitted its report on October 2017, the recommendations of which will take effect from 1st April 2019 under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) (Amendment) Regulations, 2018.

Splitting profits from compensation for directors

The amendments include restrictions on the maximum number of directors (including independent ones), a limit on the compensation of executive directors (ED) wherein shareholder approval would be required if remuneration exceeds the threshold and intake of a minimum number of female independent directors. In addition, shareholders will get all-encompassing information about the workings of their companies.

But one of the major amendments incorporated is the delinking of the roles of chairperson and CEO/MD of the top 500 listed companies.

This means that the chairperson shall not be related to the CEO or MD (as defined under the Companies Act 2013) and this revision will take effect from 1st April 2020. This gives the companies plenty of time to make necessary changes.

These stricter restrictions and amendments are aimed at breaking the nexus between promoters and their companies.

Traces of silver

However, not all companies are like Fortis (whose promoters squandered a 2 billion dollar inheritance) or Satyam. Some companies are prepared well in advance for these amendments.

Crompton Greaves undertook extra efforts through internal referrals as well as external search firms to identify independent directors while Marico Ltd invites potential successors (of current directors) to attend meetings in order to get a hang of the functioning of the company.

It will be interesting to see how the raja-praja corporations will deal with the amendments as the country still has a long way to go in terms of corporate governance.

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