Feb 27, 2017

Choice between good management and spirit of governance

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By Mr. Pavan Kumar Vijay, founder, Corporate Professionals)

India’s top professionally-run corporates have hit the headlines in recent months for all the wrong reasons on the issue of corporate governance. In February 2017, Infosys founder N. R. Narayana Murthy expressed his concerns over transparency and corporate governance at the country’s second largest software services provider. Murthy, along with other co-founders, were unhappy with the compensation package of CEO Vishal Sikka and the severance package given to certain employees on their way out. Last year, the Tata-Mistry battle had been a no-holds-barred one. Cyrus Mistry, the erstwhile chairman of Tata Sons, accused the company’s board of poor governance in myriad ways, including the manner in which he was ousted from his post.

The happenings at Infosys and Tata are not only a matter of concern from the point of view of their future prospects, but more so from the angle of corporate governance and accountability. The case would be very similar to other professionally-run large companies in India including ITC, Larsen & Toubro, HDFC, HDFC Bank, Axis Bank, ICICI Bank, IDFC and other institutions. For the record, these are among the best-managed companies in the country and have adopted the best governance practices. What may be missing at times is the spirit of governance. Superior corporate governance standards help investors separate the wheat from the chaff, limiting mispricing in the stock, if any.

Much as rules and regulations are concerns, India in recent years has adopted the best governance practices in the world. Although, the Companies Act 2013 specifies the minimum requirements of governance applicable to all companies, the capital market regulator, Securities and Exchange Board of India (SEBI) has moved towards aligning the requirement for listed companies with that of the Companies Act and simultaneously raised the bar on governance standards for listed companies.

The regulator has clearly indicated a move towards increased transparency on conducting board matters and articulated several changes in the roles and responsibilities of the board, board committees and independent directors. This move also indicates the intent of the regulator to align with the global standards on corporate governance adopted in mature economies – the UK Companies Act, US MBCA, US-DGCL, UK FRC Code, Stewardship Code and the Sarbanes-Oxley Act.

The board of directors is a vital link between shareholders and management, and hence has a very critical role and responsibility in the overall governance framework. Also, SEBI confirms this aspect, wherein the responsibilities of the board, its committees and independent directors have been the primary focus.

There’s a new class of shareholder activists beyond regulators who are forcing company boards to adopt better governance practices and transparency. A small but growing class of activist shareholders has emerged in India too, which will add heft to the fight for greater corporate transparency in the coming years. As more institutional investors control Indian companies, the role of these shareholder activists will create serious pressure because they are committing their own money. For instance, in the US, a shareholder activist group has told Apple Inc.: “You’ve got to pay dividends back to us because we own $3 billion of Apple stock. You give it to us; otherwise we will move a resolution to make you change your board.” But in India, we don’t have any of that. We have LIC (Life Insurance Corporation of India) and the mutual funds. However, people should realise is that if the investor does not like what he sees, he can sell the company’s stock and exert pressure on the board, if required

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