Corporate Governance (CG) has received considerable attention after the “Satyam” episode in India. In fact, CG systems world over have evolved in response to corporate failures or systemic crises.

However, a part of the problem in India about CG arises also due to inadequate understanding on the part of investors, as they often do not know what CG means.

This is perhaps because of the nature of capitalist development in India, which has seen collusion between the political, bureaucratic and business classes as an acceptable way of governance.

The result is that even after 20 years of sustained economic reforms, we have made very little progress towards a system of corporate governance whose primary objective is to ensure a fair deal for investors and other stakeholders.

What is truly saddening is that despite having one of the best corporate governance laws, thanks to the legacy of the English legal system, we also have perhaps the worst record in implementation.

Concentrated ownership of shares, pyramiding and tunnelling of funds among group companies still mark the corporate landscape, and boards of directors have frequently been silent spectators with the financial institution nominee directors unable or unwilling to carry out their monitoring functions.

CG-related initiatives and policies in India are of fairly recent origin. It began in 1998 with the Desirable Code of Corporate Governance, a voluntary code published by the Confederation of Indian Industry. This was followed by Securities and Exchange Board of India (SEBI) establishing the first formal regulatory framework on CG for listed companies (Clause 49) in February 2000, based on the recommendations of the Kumarmangalam Birla Committee Report.

DISCLOSURE NORMS

More recently, in December 2009, the Ministry of Corporate Affairs, issued a voluntary guideline on CG for its adoption among Indian corporates.

As a discipline, CG covers various aspects. Therefore it is hard to arrive at a unique definition of CG. According to the Cadbury Report (UK), CG is defined as the “system by which businesses are directed and controlled”. In other words, CG is a general set of customs, regulations, habits, and laws that determine how a firm should be run.

According to Infosys Founder Mr N. R. Narayana Murthy, ‘‘CG is maximising the shareholder value in a corporation while ensuring fairness to all stakeholders — customers, employees, investors, vendors, the government and the society-at-large. CG is about transparency and raising the trust and confidence of stakeholders in the way the company is run. It is about owners and the managers operating as the trustees on behalf of every shareholder — large or small.” One of the key pillars of good CG is transparency and disclosure and its role in reducing information asymmetry between insiders (management or majority shareholders) and outsiders (minority shareholders, creditors, and other stakeholders) has been emphasised by the academic researchers and regulators.

It is also quite compatible with a market economy because it interferes least with freedom and competition of enterprises in the market.

So what constitutes appropriate and relevant disclosure by a company? Any information that is “material”, in other words such information which is capable of causing a reasonable investor/stakeholder to take a different decision than he would have made in the absence of the information would constitute relevant disclosure.

Exceptions to this rule of disclosure should be strictly limited, such as trade secrets and/or information of confidential nature that may affect the competitiveness of the company.

In India publicly-held companies are required to make investor-related disclosures at two stages. The first is when companies wish to access the markets by way of a public offering. Here, disclosure obligations are governed by the Disclosure and Investor Protection Guidelines issued by SEBI.

The second relates to ongoing reporting obligations in case of listed companies either as part of their quarterly financial reports or disclosure of material events affecting the business of the company, which are governed by provisions of the listing agreement entered into by listed companies with stock exchanges.

INDIA INC'S PERFORMANCE

Is CG improving in India? To assess the CG of publicly-held companies in India this author looked at the CG Index score of S&P ESG India Index. The CG Index score is based on a corporate governance screen comprising 127 items, of which 27 are special items. The screen covers various facets of corporate governance (such as shareholder capital, shareholder rights, financial information, operational information, board and management information, board and management remuneration, corruption, leadership and business ethics etc) and has items many of which are aspirational even from a global best practices perspective.

Disclosure on an item of the screen means a score of “one” and “zero” otherwise. However, for special item a firm gets a score of ‘three” for disclosure, and “zero” otherwise.

The composite scores thus obtained by the firms indicate their relative corporate governance quality. The maximum score that a firm can get is 100 and the minimum score is zero. The sample for CG Index is NSE listed top 500 Indian firms as per market cap on the last working day of each financial year.

Positive trend

Currently, the CG Index scores are available for six years. Approximately 26 per cent of the firms have CG Index score higher than 55, around 53 per cent of the firms are between 47 and 54.7, and the remaining 21 per cent firms have their CG Index score less than 46.4.

The minimum CG Index score was 31.5 recorded in 2006 and the maximum was 80.1 recorded in 2009.

The CG quality of Indian companies is gradually improving. A CG Index score upwards of 70 indicates disclosure comparable to global standards. The number of companies crossing this threshold was only three in 2005 but increased to six in 2009 before dropping to five in 2010.

While a steady increase in the average CG Index score coupled with rising number of companies crossing the threshold CG Index score of 70 over the years is a positive sign, for majority of Indian companies it is still a long journey before they get anywhere near global CG standards.

(The author is Head and Senior Economist at Crisil Ltd. The views expressed are personal.)

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