How to improve corporate governance

Shyam Vasudevan | Updated on May 25, 2021

SEBI must have a set of parameters to evaluate excellence in corporate governance istock   -  istock

Rather than introduce more regulations, SEBI must tweak the norms depending on a company’s track record

Corporate governance, as a topic, gained importance over time and after every major scam, either in the stock market or companies with fraudulent intent/management. A paradigm shift on reporting requirements happened after SEBI accepted and implemented the Narayana Murthy Committee recommendations in 2004. There was a sea change in corporate governance requirements with respect to board, audit committee, shareholders disclosures and CEO/CFO certification on internal controls, and the reporting standards were significantly elevated.

The Satyam Software scandal rocked the corporate world in 2009 and this prompted more recommendations for tightening corporate governance norms for listed companies. The Companies Act, 2013 elucidated the provisions on board processes, board meetings, independent directors, adherence to accounting standards, audit committee meetings, related party transactions and disclosures in financial statements.

SEBI introduced the SEBI (Listing Obligations and Disclosure Requirements), 2015 (LODR) and thereafter has been continuously introducing new regulations by way of amendments.

Added to these, the Institute of Company Secretaries of India issued secretarial standards on board and general meetings in July 2015. The latest regulation from SEBI is to re-christen business responsibility reporting as business responsibility and sustainability reporting with added responsibilities, reporting requirements and costs.

The question is whether all these measures have helped/will help improve corporate governance in listed companies.

It’s trite to say that when carrots don’t entice humans to fall in line, the stick approach has to be adopted. Though self-regulation is the best preventive medicine for corporate illness, Indian Inc is neither mature enough nor evolved to get into a hands-off, self-regulation mode.

But will the continuous tightening of regulations alone help improve corporate governance? For example, by merely adding an independent director on the board of a material unlisted subsidiary of a listed company, can corporate governance be greatly enhanced? The answer may be “No”. Corporate governance norms, for instance, were either ignored or thrown to the wind by companies such as Satyam Software, IL&FS, ICICI Bank, and Kingfisher Airlines.

Beyond its mandate

Of course, there is a heavy price to pay for corporate misconduct; nevertheless, regulations alone will not prevent scams from taking place. SEBI, expected to play a balanced role using its wide powers, appears to have gone beyond its mandate.

There is no final authority to propound new laws than the parliamentarians, who in their wisdom passed the Companies Act, 2013 and various amendments subsequently. It will be obvious from a comparison of company law and LODR how SEBI, has increased the compliance burden of listed companies, and with every scam or opportunity this seems to be increasing.

The continuous introduction of new regulations has exponentially increased compliance costs for listed companies and forced managements to spend a lot of time on them, leaving little time for business affairs that have become more challenging in these Covid times. It’s also true that interpreting these regulations are sometimes difficult due to lack of clarity.

For instance, to say that a company must immediately report when faced with a cyber/ransomware attack, has several implications. It may take several days or months for a company to assess any damage caused by such attacks and implement corrective actions.

Further, such incidents, if publicly reported, can set off lot of anxiety in the market irrespective of the complexities of the attack. Not all listed companies can financially afford to follow these regulations.

It’s unclear if SEBI has a mechanism in place to measure the effectiveness of all the rules, framework and disclosures being mandated. Corporate governance should be assessed based on a company’s track record over a period in areas such as overall compliance with the law with no major violations, being a honest taxpayer, indulging in ethical business transactions, fair treatment and non-discriminatory behaviour towards employees, fairness in dealing with customers and suppliers, societal and environmental consciousness, , etc.

To make life easier for companies known for good corporate governance and with no black marks over the years, SEBI can categorise and grade these companies — for instance, a red graded company will have more norms to follow than an orange/yellow or green one. This will incentivise companies at the bottom of the ladder to move to the next grade to minimise compliance obligations and save costs.

Similarly, rewarding companies that excel in corporate governance seldom have any impact on companies that have no qualms about violating norms. The solution may be to offer lesser and lesser of compliance obligations for companies that excel while making them more stringent and cumbersome for companies which don’t.

To evaluate excellence in corporate governance, SEBI can have a set of parameters. For example, by assessing transparency in board and shareholder processes, whether a company has directors from companies with strong corporate governance practices, the level of disclosures to shareholders and stock exchanges, obtaining feedback from independent directors, foreign institutional investors, minority and small shareholders, conducting independent surveys through neutral agencies, etc., can help SEBI form an opinion.

Understand the pain points

Corporate governance cannot be guaranteed merely by introducing more regulations. SEBI has to work with industry on an ongoing basis to understand the pain points and mend the regulations in a manner that they are made practical and show the path towards good governance.

SEBI can also educate companies through short-term courses free of cost to company promoters/directors/executives, which could also go a long way in inculcating the principles of corporate governance. Since training can be conducted virtually, this may not seem a challenge.

Obtaining feedback from industry captains/industry bodies at each and every step will ensure smooth transition when new regulations are proposed to be introduced. The Ministry of Corporate Affairs has been sensitive to industry views and the same can definitely be expected of SEBI too.

The writer is Vice-President, Legal & Secretarial, Elgi Equipments Ltd. Views are personal

Published on May 24, 2021

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