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Corporate governance breakdown in India’s corporates: Time for an overhaul?

Corporate governance breakdown in India’s corporates: Time for an overhaul?

What are the reasons behind India's repeated governance breakdowns, how robust are our binding principles, and what makes them so hard for companies to keep up with?

India has seen a barrage of corporate governance lapses over the last few years. Each instance is met with industry-wide scrutiny, dialogue, and speculation before the momentum around it dies down. India has seen a barrage of corporate governance lapses over the last few years. Each instance is met with industry-wide scrutiny, dialogue, and speculation before the momentum around it dies down.

Although the principles of governance are hard-wired into most corporate rulebooks, even the titans of India's industries seem to be having a hard time adhering to them, with steps being initiated after the unsavoury events have come to the fore. But are these "post-mortem" analyses enough? In a country where corporate governance adherence has never been a strong point, what's causing these lapses, and what more can be done to strengthen and foolproof the machinery? These are the questions companies and regulators need to ask urgently.  
 
Top reasons for corporate governance breakdown 
 
Interestingly, despite the issues we're seeing now, India has been credited with having some of the most stringent corporate governance practices worldwide. Starting with the 2013 Companies Act, all the way to the comprehensive governance guidelines and mechanisms set in place by SEBI as recently as 2022 - there has been no shortage of rules and regulations to avoid conflicts of interests and uphold the pillars of governance. But unfortunately, these mechanisms have not paid off the way they should have.  
 
There are many reasons for the repeated governance failures we are seeing in India's corporates. Some of the critical ones are outlined below. 
 

  • Non-adherence to regulations: SEBI came out with a guideline report earlier, mandating India's top listed companies to separate the chairperson's role from that of the CEO or MD, and disallowing relatives from holding these positions. Reports state that over a third of these companies are yet to comply with the mandate, among them several of India's prestigious market leaders. The low level of compliance has made SEBI change the decision, and separation of the CEO/MD roles has now been made voluntary. Promoter led boards also need to create an extra layer of separation with independent directors that remain truly independent. 
  • Challenges in the insider model: We have discussed how a board that is not open to conflicts, or is unable to counter the views of other members or the CEO candidly, is a board that is headed to failure. This is a huge problem in boards where diversity, be it in terms of gender, age, expertise, nationalities, exists as mere tokenism. Unfortunately, this is common in India, which is home to family-owned multimillion-dollar businesses, where the majority shareholders are often "insiders" - board members with long-term involvement in the company, and directors who are often relatives of other board members, the chairman or the CEO.  
  • Lack of transparency: The role of an independent director in upholding the sanctity and integrity of a board and its direction cannot be overstated. However, due to many reasons, they are often unable to perform their duties effectively, including obligations to board members who have recruited them. Independent directors selected and supervised by extraneous committees have a higher chance of dispensing their duties as the watchdog of compliance.  
  • Lack of due compensation: Given the weight of the responsibilities of the independent director, many feel that the remuneration they receive is not commensurate. When compared with benchmarks set by developed countries, like the Switzerland, UK and US, the contrast is glaring. Compensation is further reduced if the company has encountered losses or has declining revenues. Recent revisions by the MCA seek to alleviate some of these concerns. Fair compensation would mean more qualified people are willing to take on the role of independent director, and this in turn would fortify fair governance practices within the company. 
  • Lack of technology enablement: Technology has transcended the role of an enabler in all aspects of the value chain to a distinct competitive advantage. Newer committees that include Digital transformation and ESG must be constituted as part of the boards. 

Conclusion: How can corporates avoid governance failures? 

Corporate governance refers to the oversight of the company management in line with the directives set by a regulatory body, whether exercised by a board of directors or an individual.

For a high-functioning board, the independence of its directors, segregation of duties, transparency of conduct, and fairness of representation in terms of diversity and inclusion - underpinned by a strong commitment to protocol - are indispensable traits. 

Unwavering adherence to regulations is fundamental to the success of any board or organisation. Because, whenever public trust is placed on an entity, the role of a central regulatory body automatically becomes critical for the sake of protecting the interests of the minority stakeholders and the long-term sustainability of the company. 

Half-hearted efforts to comply with regulations can prove disastrous to companies, as we have been seeing from experience. 

Beyond stricter supervision, authorities have it on them to ensure governance is not done in the letter of the law, but rather in the spirit of the law. Only then can the true purpose of corporate governance and its fundamental principles of transparency, accountability, fairness and equity, and responsibility be achieved.  

(The author is CEO, BCT Digital.)