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Key to corporate governance lies in change in mindset

Key to corporate governance lies in change in mindset
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First Published: Wed, Dec 09 2009. 10 20 PM IST

Illustration: Jayachandran / Mint
Illustration: Jayachandran / Mint
Updated: Wed, Dec 09 2009. 10 20 PM IST
India’s experience with corporate governance has been a chequered one. Today, firms in the country are at a threshold. While much has been achieved, there is an urgent need to identify the key factors that will determine the road ahead.
Illustration: Jayachandran / Mint
India’s progress on governance has been noteworthy. Findings from the India Spencer Stuart Board Index, which tracks governance trends, show that Indian firms have a good track record in meeting the governance criteria laid down by Clause 49 (that governs the appointment of independent directors on the boards of listed Indian firms). Ninety-five per cent of the firms surveyed met the requirement of non-executive directors comprising no less than 50% of the board. All boards led by non-executive chairmen also met the criterion for independent directors. Creditably, 54% of the surveyed boards in 2008 were led by non-executive chairmen— ACC Ltd, ICICI Bank Ltd, Grasim Industries Ltd, Infosys Technologies Ltd, Mahindra and Mahindra Ltd, to name a few. This is in comparison with 39% of boards in the US and 89.3% in the UK (chairmen there are named as part-time).
However, there is also a realization that mere compliance has not always resulted in effective board functioning. Today, issues such as separation of the roles of chairman and CEO, the true definition of independence, need for nomination committees, board compensation and role of auditors have come up as critical areas that will enable firms to practise corporate governance in true spirit.
Today, it has become important to highlight that governance needs to evolve from a “checklist” process to one that aims to bring about a fundamental change in the way business is conducted.
In the UK, separating the roles of chairman and CEO has resulted in more transparent board functioning. Not only does this result in shared responsibility, but a relationship based on mutual trust and regular contact can make for a powerful partnership. The chairman runs the board, the CEO runs the business. Furthermore, the non-executive chairman should lead the nominations committee and rigorously institute processes related?to new director recruitment and board evaluations. These are practically non-existent on Indian boards and need to become a practice.
There has also been discussion around the “independence” of independent directors. Can friends and acquaintances of the chairman really be independent? Can directors who are paid commissions or hold stock in the company qualify as truly independent? In the end, it is the individual’s mindset that makes all the difference.
If they are able to voice their opinions in the spirit of constructive criticism, commit time to their role and genuinely believe in their responsibilities towards maintaining governance in the business, they are independent. Some practical next steps include restricting directorship tenures to six-nine years and the number of board memberships to below 10 for independent directors. Some believe the latter should be as low as five to be truly effective.
One increasingly important issue related to governance has been the role of auditors and the need to build accountability into their role. Disclosures can no longer be a list of pointers; there needs to be a system that makes them responsible for their comments on and approvals of accounts.
Board compensation in India, while slowly moving towards global levels, does have its share of ambiguity. In the UK, companies pay a retainer and attendance fees, but do not grant stock options. In contrast, in the US, a large percentage (almost 60%) of board compensation is paid in equity. In India, while sitting fees are governed, a large part comprises commissions that are linked to profits and, in some cases, stockholding.
Going forward, companies will need to find a balance—arriving at levels that compensate non-executive directors adequately for their time, but ensuring that it does not compromise the independence of these directors. And all of this needs to be done with transparency.
While all of the above are important and require attention, there is no moving away from the fact that governance will ultimately be driven by a responsible management. There can be no substitute for that. This becomes all the more critical in the case of promoter-driven companies. There are examples in the private sector, such as the Godrej group, where family businesses have professionalized their management, and even outlined requirements that family members need to fulfil before joining the company.
The public sector, however, needs to inculcate change at the operational level for governance to truly make itself felt.
A change in the mindset of management can also resolve the talent shortage of independent directors. On the one hand, companies need to allow their senior executives to take on outside board memberships. On the other hand, they need to be open to looking beyond the regular pool of directors to fill their board positions. Not only will this expand the pool of talent, but it will also allow first-time directors the opportunity to observe and learn how boards function.
Corporate governance can never be a science; there are too many inter-linkages and viewpoints to allow a set of regulations to cover all the aspects. It is a “mindset” that every company needs to cultivate and strengthen; a corrective process that learns from failures and shortcomings. Remaining true to the spirit of governance—that is the choice that every company will need to make.
Anjali Bansal is with the Mumbai office of Spencer Stuart and leads the India practice.
Send your comments to spencerstuart@livemint.com
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First Published: Wed, Dec 09 2009. 10 20 PM IST