Home / Opinion / Columns /  Opinion | The quiet transformation of corporate governance

As trends go, matters that are categorized under the general umbrella of “corporate governance" are all set to take up greater mind space among CEOs and boards. These include issues pertaining to the wholesomeness of board and committee composition, disclosure standards, succession planning, executive compensation, stakeholder engagement, board effectiveness and evaluation, risk management and strategy for environmental, social and corporate governance (ESG). On account of the criticality of the drivers described below, we expect governance to become part of the staple agenda for boards, going forward.

First, consider regulatory enforcement. India’s position as No. 7 of 190 on protection of minority interests in the World Bank’s Doing Business report is a carefully curated outcome, arising from increased regulatory will to enforce rules. Actions of the Securities and Exchange Board of India (Sebi) have made corporate governance a buzzword through bold amendments following the Kotak Committee Report, and strong enforcement action in the cases of Sun Pharmaceuticals, Yes Bank, Fortis Healthcare and ICICI Bank. Similarly, the ministry of corporate affairs has issued National Guidelines On Responsible Business Conduct recently to set standards for business practices that are on par with expectations of responsible business conduct under the United Nations General Principles. The Reserve Bank of India has also come out with a discussion paper to propose guidelines for capping the remuneration of CEOs of banks. Clearly, regulators are keeping a close watch.

Second, take real instances of personal liability of directors. We see increasing examples of onerous measures in the nature of personal liability being imposed on directors who were seen to have failed in discharging their governance responsibilities. The Supreme Court in the Jaypee Infratech case prohibited directors from alienating their personal properties or assets in any manner. Recently, it allowed the arrest of the directors of Amrapali Group. The National Company Law Tribunal restrained the directors of IL&FS from transferring or creating any charge on movable or immovable properties owned by them. These examples, though extreme, are early rumbles of a definitive move in corporate jurisprudence to hold directors personally liable for the failings of companies.

Third, there has been a palpable increase in activism. Minority shareholders and institutional investors are now able to influence major corporate decisions. The recent cases of Fortis Healthcare, Apollo Tyres and Tata Motors are just the tip of the iceberg. Regulatory changes such as e-voting and voting restrictions on interested shareholders form the foundation for such activism. Proxy advisory firms keep a close watch on corporate actions and provide considered opinions that are highly regarded by investors. Governance activism is also being driven by other stakeholders, such as employee and environmental groups, often through the intervention of courts or pressure of public opinion.

Fourth, the effect of the stewardship mandate of investors. The change in the attitude of institutional investors from a focus only on financial performance to engaging with boards on issues like transparency and disclosure, diversity, climate change and ESG, has been largely driven by changing regulatory requirements for institutions to take up an active stewardship role vis-a-vis their investee companies. In 2010, Sebi mandated the disclosure of voting policies by asset management companies on their websites and in annual reports. In 2017, the Insurance Regulatory Development Authority of India prescribed seven stewardship principles to be implemented by all insurance companies. The United Kingdom, which issued its stewardship code in 2010 and modified it in 2012, proposed a revised code in January 2019, requiring fund managers to specifically consider ESG factors, including climate change, even while making investment decisions.

Fifth, consider the role of “governance scorecards" and focused measure of governance. Investors the world over are factoring in ESG-related risks. This has compelled the development of governance scorecards and other such focused measures of governance. The BSE-IFC Corporate Governance Scorecard, for instance, sets up a mechanism for benchmarking companies on various governance issues. These scorecards raise the bar for companies to demonstrate not just compliance with the law, but to go beyond the letter of the law (such as increased transparency through voluntary adoption of integrated reporting, higher standards of board accountability and protection of stakeholder interests).

There are also softer nudges, such as rising pressure to improve share value by unlocking a governance premium, changing share price movements arising from increased institutional ownership of publicly-traded assets, internal dependence on good governance frameworks as a risk-management tool, and, more generally, the effect of a market trending towards higher governance standards. There is limited time to catch up once a governance crisis strikes. The time to prepare is now.

U.K. Sinha and Amita Gupta Katragadda are, respectively, senior adviser and partner in Cyril Amarchand Mangaldas

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