The Hindu Business Line : Corporate governance: Survey lists pros and cons of family owned cos

Mumbai, Oct. 23 Family-owned companies dominate India’s corporate landscape, according to a new joint survey on Indian corporate governance by Moody’s Investors Service and ICRA Ltd. Such firms have specific characteristics compared to companies with more widespread share ownership.

The survey covered certain corporate governance practices of 32 Indian companies in 16 prominent family groups, covering a broad cross-section of Indian industry.

Positive characteristics of family control can include a long-term perspective and an ability to act quickly; and Indian family companies have responded well to the opportunities available in the fast growing and liberalising economy.

Concern

However, family control can also raise specific corporate governance concerns – with potentially negative credit implications – that include adaptability, leadership transition, checks and balances, and transparency, says the report.

“Although Indian corporate governance practices are improving, this largely reflects regulation of listed companies, particularly regarding ’checks and balances’ such as composition of the board of directors and the operations of audit committees,” says Mr Chetan Modi, Moody’s India Representative Director and a co-author of the report.

“There are material residual issues regarding checks and balances, but these are generic to corporate India and not isolated to family companies – for example, the lack of activist shareholders and a business and cultural environment that does not permit hostile mergers and acquisitions. Furthermore, important governance issues persist in areas not covered by regulation,” says Mr Modi.

“The lack of board nomination sub-committees in many companies suggests that succession planning is not fully deliberated with independent directors. There is often insufficient transparency on ownership/control, related-party transactions and the group’s overall financial position. Also, the prospect remains of higher leverage as families try to maintain control while implementing their often aggressive growth plans,” adds Mr Anjan Ghosh, ICRA’s General Manager and a co-author of the report.