Corporate governance principles do not follow a one-size-fits-all approach. That would elude the local contexts in which companies operate, which are key to understanding practices and behaviours as well as expectations of investors. This is important because each country’s legal framework is built on historical choices and subsequent developments. No system is better than any other. However, local and national specifics cannot ignore the trends of globalisation, the free and immediate flow of information, as well as the resulting access for investors and stakeholders. Events in one part of the world can have global consequences and impact any economy. Every time an economic crisis unfolds, investors learn to their expense that some companies they invested in did not follow good governance principles. Thus, investors realise that financial data alone cannot give the full picture to provide the comfort that the company not only talks the talk, but also walks it. Therefore, over the years, corporate governance has become a predominant topic in discussions related to investments, joint ventures and partnerships.
Companies worldwide recognise these changing trends and act on them. They recognise the opportunities that come with embracing good governance. For one, this allows them to attract more investors. But good governance also enables companies to gain reputation, which brings with it access to talent, new customers and public recognition.
Some companies in India have been at the forefront of corporate governance for years. The Securities and Exchange Board of India and institutional actors, such as the Bombay Stock Exchange and the Institutional Investor Advisory Services, have also played an instrumental role in raising awareness among market players to help understand the importance of corporate governance. International Finance Corporation (IFC) has been partnering with many to participate in this journey of increasing India’s economic footprint in the world. One of such partnerships has materialised in the Indian Corporate Governance Scorecard, which was first launched in 2016 and is now celebrating its second edition.
Illustration: Sameer Pawar
A scorecard is a tool that serves to measure levels of corporate governance for listed companies. Out of the realm of the regulatory world, it is a voluntary action that serves to benchmark practices on different topics related to governance and provides useful information for companies, investors, regulators and stakeholders. Of course, scorecards have their own limitations: A high score should not be seen as an indicator of current or future financial performance. The scores also do not indicate the permanency of governance practices: A company’s governance may improve or deteriorate from the date of the scoring. Nevertheless, scorecards have been used worldwide and have helped in improving practices of individual companies and markets in general. IFC has played a key role worldwide in such an exercise and we are proud to have contributed to the development of the two editions in India.
The Indian Scorecard is built around 70 questions, covering four essential areas: Rights and equitable treatment of shareholders, role of stakeholders, disclosures and transparency and responsibilities of the board. While the driving principles have been those of the G20/OECD Principles of Corporate Governance, the questionnaire has been adapted to India’s legal and regulatory framework. Therefore, while the scorecard provides information that can serve the needs of investors and stakeholders worldwide, it also provides a fair representation of whether the Indian private sector is in line with global and national requirements.
From 2016 up to today’s report, we already see a growing interest in the scorecard. We initially started with 30 companies and reached 100 in 2017. For the first time, we published the names of companies with highest scores which, we hope, will boost interest and generate knowledge-sharing among companies. We are confident that next year’s edition will cover a higher number and attract even more attention. But it is not only about the number of companies we scored. Changes have happened at the level of practices and this shows when comparing results of both years.
In 2016, out of the 30 scored companies, 50 percent reached an overall ranking of either ‘leadership’ or ‘good’ with the remaining ranking either ‘fair’ or ‘basic’. For 2017, the proportion of ‘leadership’ or ‘good’ reached 60 percent even with the sample size rising from 30 to 100. This is impressive by all accounts and demonstrates the seriousness of Indian economic actors in the field of corporate governance. Interestingly, two companies (HDFC and Infosys) that made it to the ‘leadership’ category in 2017 were there in the 2016 exercise too. One of the factors for this, in addition to high level of governance, is that they engaged with their stakeholders proactively and maintained processes and systems to manage them. For Infosys, the scoring has factored in the controversies around disclosure practices. Yet, on a broader comparable landscape, its governance practices remain high enough to make it to the top three. We were also happy to see a sharp increase in Wipro’s score. This happened due to improved disclosures on board evaluation, succession planning and leadership, areas that remain insufficiently covered by many listed companies.
It is worth noting that this year our results showed a clear correlation between high scores on the scorecard and financial ratios among banks: Those scoring the highest, see a gain of more than 1.5 percent on return on assets as compared to banks scoring the least. Additionally, banks scoring the highest also see a better ratio of gross non-performing assets, with a staggering difference of 12 percent.
Overall, given the regulatory requirements and the need for Indian companies to attract capital, most companies score better in the category of disclosure and transparency. In the remaining three categories, the score range is wide. For example, in the category of ‘rights and equitable treatment of shareholders’ the highest score was 80, and the lowest 28. The two categories that need improvement are ‘role of stakeholders’ and ‘responsibilities of the board’.
What the scorecard shows is that it pays to abide by good corporate governance principles. Regulators and investors understand that poor governance standards can add negative impact on cost of doing business, hence their push for better standards. Indian companies understand this as well, as our results show. We could observe more companies providing shareholders with detailed transcripts of the previous annual general meetings, enabling shareholders to ask questions in advance, or even participate via video or tele-conferencing. Although the number of such companies is still in the single digits, it is clear that they can score higher should they give it a priority. Evaluation across the four categories shows that there are companies that achieved an 80 percent score in one area. Next year, we hope to see companies who get equally high scores across all categories.
As they embark on this new journey, companies need to avoid box-ticking, adopt changes that go beyond compliance to really embrace corporate governance in its key component, namely behaviours and practices that truly live by the principles of corporate governance. These are accountability, fairness, transparency and independence.
The IFC, and its India partners, will keep promoting good corporate governance and intends to remain as a long-time and trusted partner for the development of the private sector. (The author is the Regional Corporate Governance Lead, South Asia at IFC)
(This story appears in the 02 March, 2018 issue of Forbes India. You can buy our tablet version from Magzter.com. To visit our Archives, click here.)