As Indian companies get larger and integrate with the global economy, the issue of corporate governance has come to dominate discussion on how prepared India Inc is to take on the rest of the world. A recent study by credit rating firm Crisil has brought out some very interesting facets to the debate on whether Indian firms fit the bill when it comes to corporate governance. The study takes the top 50 Indian companies?chosen from the NSE?s S&P CNX Nifty 50 index?and compares them on some key parameters with the top 50 companies in the US, chosen from the NYSE 100 index. Let us first go through some of the key findings before analysing what it means for governance standards of Indian firms.
The study finds that 48% of Indian firms have the largest shareholder holding over 50% stake. In the US, among the top 50, the largest shareholder holds less than 10%. In India, the largest board size is 17 and the smallest is 4, with 44% of the top 50 having more than 12 directors. In the US, the largest board size is 18, the smallest 10, and 66% of the top 50 companies have over 12 directors. Of the 50 Indian companies, 58% have majority independent boards, while 12% have less than one-third independent directors. By contrast, in the US, all the 50 companies have majority independent boards.
Another interesting finding is that 35 of the 50 companies have 50% or more executive directors?those performing key functions in the company?on the boards, while in the US, 98% of the companies have less than 25% executive directors, which means the majority directors on the US boards are non-executive directors. 60% of the top 50 Indian companies have separate chairmen and CEOs, while this figure is only 20% for the US companies. A lead independent director?a kind of representative for independent directors on the boards?is present in only three of the 50 Indian companies?Infy, Wipro and Dr Reddy?s?while 20 of the top 50 US companies have such directors. In the US, all the 50 companies have fully independent audit, remuneration and nomination committees. In India, percentages of companies having independent committees vary.
What do all these figures really mean? Going through individual parameters, it?s clear that while Indian firms have a long way to go in some parameters, there are areas where the Indian structure does lend itself to better governance. For instance, while on the one hand, it may be argued that having the largest shareholder holding over 50% in companies is, prima facie, not a very democratic holding pattern, it often cuts both ways. A major shareholder, who is also chairman of the company may, in many cases, be able to give a more long-term direction than, say, a professional chairman in a widely-held company, like in the US.
On the other hand, while the predominance of executive directors (EDs) can be said to be against the concept of board independence, experts also argue that having EDs on the board gives independent directors (IDs)?who typically should play the role of watchdogs?the chance of watching the management function from close quarters. Besides, since most companies in the US have combined the chairman and CEO functions, IDs will have to depend mainly on him to understand the workings of the company in the absence of EDs on the boards. Further, combining the functions of chairman and CEO?the predominant practice in the US?works so long as the top man is working in the interests of the company. Recent instances in the US have, however, shown the damage rogue CEOs can inflict on companies.
The findings also show that concentration of ownership doe-sn?t impede governance in the case of most Indian companies. In fact, in some cases, the promoter group, because they hold a large stake, may be more keen to ensure that the company is well governed. The bottomline is simple: while companies, particularly those overseas, may tend to fulfil the regulatory obligations on corporate governance, typically, governance goes much beyond the checklist. And hence, there?s no single formula.
But rating firms and governance experts say India Inc is showing a marked sign of improving its governance standards, with greater transparency and disclosure standards and a focus on investor relations.
The fact that there are enough companies turning pro-active in the governance area is itself a healthy sign.