Mumbai: Corporate governance assessments will have a pivotal role in investment decisions in India, even as managements focus on short-term measures to sail through the slowdown and the crisis in the aftermath of the collapse of two large non-banking financial companies (NBFC), according to the International Finance Corporation (IFC).
The study, Corporate Governance Scorecard for 2019, said, despite challenging times, companies in the S&P CNX BSE-100 have been able to maintain high governance standards. This is largely due to companies institutionalizing their governance processes.
Companies in the information technology and consumer staples businesses led in their corporate governance practices, whereas firms in financial services space fared worse compared to previous years due to the steady headwinds of past six quarters, according to the joint study by IFC, which is a member of the World Bank group, BSE and Institutional Investor Advisory Services India (IiAS).
“The almost $20 billion of debt held in companies under the Insolvency and Bankruptcy Code, while being set to clear up, is lesson enough for credit markets on the importance of assessing not just credit ratios, but governance practices before they lend," said the report.
The study suggests that 44% of BSE 100 companies had directors abstaining from voting on related party transactions as they had conflicting views and 49% of the companies have a policy of disclosing conflicts. 57 of the BSE 100 companies and 16 of the 50 IPO companies mention the existence of succession planning for either their boards or senior leadership, a marginal increase over last year.
The study found that while many companies are following Securities and Exchange Board of India (Sebi) mandated governance norms, there is a push back citing ‘ease of doing business’. Case in point of these contradictory forces is the pushback on Sebi regulation seeking separation of chairperson and CEO roles. Sebi has directed companies to comply with this provision with effect from 1 April, 2020.
“We find that 57 companies in the BSE 100 and 23 of the 50 IPO companies have separated the roles of the Chairperson and CEO, with the Chairperson being Non-Executive. However, some companies have a Chairperson and CEO from the same promoter group," said IFC in the report.
The report also raised concerns over the current trend of using of whistleblower complaints in media. “Whistle-blower mechanisms in India work for the most part. But today there seems to be a dangerous trend of whistle-blowers using media to get attention," said the report.
The use of media to raise questions on management has several repercussions. Recent cases where stock prices of companies took a severe hit due to release of whistleblower complaints to the media include those of Yes Bank, Sun Pharma, and Infosys Ltd to name a few.
“In a regime where defamation laws are weak, an event of this nature is essentially out of control of boards. Boards can only react, and not pre-empt this. Boards need to be trained to tackle these trial-by-media episodes," the report added.