The State of Corporate Governance in India: Boards open to improving their effectiveness

More than 50% of the directors surveyed in India said that their boards hardly ever evaluated their own effectiveness
31% of companies did not have their board’s involvement to systematically address corporate risk management
Around 25% of the companies did not have a fixed retirement age for their chairperson and non-executive directors
The percentage of women directors continued to remain low @ 4.6%


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April 2012: The collapse of iconic financial institutions and the resulting global economic crisis made policymakers worldwide critical of existing government practices. Several problems, including the lack of risk management processes, skewed remuneration structures and low levels of shareholder involvement were identified as instrumental in bringing about the collapse. Regulatory changes such as the Dodd- Frank Act and recommendations by the NASDAQ, NYSE, FRC UK, etc, have evoked a mixed response. And though the jury is still out, at the end of the day no law can please everybody. The real issue is about ensuring alignment with the idea or spirit of corporate governance. Mandatory laws and voluntary self-regulation need to go hand in hand.


In India, policymakers are shifting focus from legislation to a voluntary approach. The country has been rocked by scam after scam, tainting public and private companies across sectors. Policymakers have concluded that making blanket changes is not the solution. Lawsuits, CBI inquiries and widespread media criticism have led to extensive debates about the role played by independent directors and the extent of their liability in the recent governance failures. NASSCOM, MCA and SEBI, have recommended stricter corporate governance mechanisms. But more importantly, our research found that effective implementation is the key.


The third edition of Hunt Partners’ biennial India Board Report, co-authored by ValueNotes, investigates the functioning of corporate boards in India. The report is a first of its kind, definitive survey on board composition, effectiveness and best practices. The study consisted of a two-part survey across leading Indian companies and eminent independent directors.
– Survey I studied the statistical data around boards in India, and targeted over 500 companies – the top 350 companies by market capitalisation listed on the BSE, 100 emerging companies with high growth, and 50 companies that have attracted large private equity investments
– Survey II was aimed at obtaining the views of over 150 eminent independent directors regarding the functioning of Indian boards, including compliance, independence, and overall management.


Risk management is increasingly seen as a key governance agenda, but needs more attention at the board level. 31% of companies do not have their board’s involvement to systematically address corporate risk management. 61% of the directors felt that linking director compensation to risk and responsibility will have a high impact on improving board effectiveness. “There needs to be an alignment between corporate strategy and risk taking. Risk management needs to be tackled at the board level. Sadly, our survey found that risk management is not considered “very critical” by over 70% of the respondents,” said Sunit Mehra, Managing Partner of Hunt Partners.


Arun Jethmalani, Managing Director of ValueNotes, added, “The survey has revealed some stark facts. Most alarming is that while corporate India is aware of and acknowledges the importance of self-governance, what we see on the ground is mere paper compliance – ticking off the boxes! The rules have to be followed in both letter and spirit if the status of corporate governance has to improve in India.”


Some of the key findings of the report include:


  • Tightening of corporate governance regulations has resulted in greater compliance, but not necessarily made governance more effective. An important regulation – Clause 49 of SEBI’s listing agreement – has been widely praised for the standards of corporate governance that it sets. However, only 38% of the respondents felt that it significantly contributed to improving governance. The survey findings clearly highlight the limitations of regulatory compliance and the existing gaps in implementation.


  • No formal process for measuring board effectiveness. More than 50% of the directors surveyed said that their boards hardly ever evaluate their own effectiveness. Among the boards that do conduct evaluations, the majority opt for self-assessment. More than half the respondents pointed out that their boards did not even have a formal process to evaluate their effectiveness.


  • Limited talent pool is perceived as the biggest impediment in changing board structure. Around 25% of the companies did not have a fixed retirement age for their chairperson and non-executive directors. The percentage of women directors continues to remain low, and was a niggardly 4.6% for the year 2009-10. The most desired change in board structure is increased diversity.


  • The top three board priorities indicated are ensuring overall corporate and statutory compliance (90%), monitoring business and operating performance (87%), and establishing and monitoring financial standards and internal controls (82%). Leadership development, succession planning, CSR and risk management continue to be low on the board priority list.


When it came to board composition, a worrying fact came to light – the average percentage of women directors on boards was extremely low at 4.6% for the year 2009-10 and it has remained relatively constant over the past four years. India’s percentages are lower than countries such as Canada, US, UK, Australia and Hong Kong, where the ratio of women directors ranges between 8% and 15%. The Standard Chartered Bank report ‘Women on Corporate Boards in India 2010’ also had similar findings. According to the report, only 5.3% of directorships on BSE-100 companies were held by women.


Interestingly, a revolutionary bill was recently introduced in the French Parliament which, if passed, will mandate 40% of board seats for women. This seemingly bold move is in line with a global realisation that having more women on boards makes good business sense. It is increasingly acknowledged that boards should better reflect their customers and employees, a substantial chunk of who happen to be women. Women have a collaborative leadership style, which can greatly benefit boardroom dynamics. They see problems and solutions differently from men. Unfortunately India Inc. has not woken up to this opportunity yet. The glass ceiling is still very much in place.


To download the report, please click here or send us an email


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