Governance Aligns, Safeguards Stakeholder’s Interest
Corporate governance is now part of Environment, Social and Governance (ESG) principles. While the E & S have taken centre stage Governance has been in the shadows. Similarly, governance has ceased to be the buzzword (a decade ago it was) its adherence and importance has never been more critical than ever before.
Corporate Governance is a facilitator of the ‘conduct’ of the organization. It establishes accountability, drives transparency & fairness, and ensures responsibility across legal, social, and economic grounds. It aligns and safeguards every stakeholder’s interest, and institutionalises relationships between the stakeholders.
Good governance enhances value across the economic ecosystem.
Rising index is attracting a new breed & luring ‘wounded’ investors
Over the last two years an estimated 15 million new investors have bloomed. It took us three decades to reach 20 million. Rising index is feeding the frenzy, luring experienced (but) many ‘wounded’ investors. These numbers may indicate a clinching confidence in the listed companies; all is well.
This is punctuated by the shrillness and smugness on the part of the policymakers. They propagate that a rising index is a proxy for a flourishing economic ecosystem. The ‘experts and analysts’ don’t help. They lead the lambs to slaughter. The retail shareholders latch on to the noise.
It may end very badly for most. It has. Several times.
Our stock market is the 6th largest, but the equity market is yet to mature. A thriving equity market is characterised by investor participation in vital decisions, accountability from the management; assurance & protection from the regulators.
Governance drives efficiency, invariably the growth cycle itself
Most of India’s listed companies, particularly the bottom half of the BSE 500 need a ‘governance ‘overhaul’. The several instances of poor governance and misconduct have exposed the weaknesses in the corporate governance framework.
A Crux study across the bottom two quartile of the BSE-500 and focused on minority shareholders protections & rights, points to rampant misconducts on part of the ‘controlling power’. The study presents a depressing picture. It highlights stress & lacuna in the working of the board, glaring gaps in remuneration & audit committees and ineffective risk management methodology. There is duplicity in disclosure.
Boards lack capacity. Encourage grubby practices. Exploit. They are highly skewed to the interest of the controlling shareholders, much more in family owned organisations. Most indulge in related-party transactions, self-dealing i.e. use of corporate assets for personal gain. Company assets are sold at excessively low price, purchased at inflated price; loans offered at lower rates.
Minority shareholders expropriated
The boards disregard other stakeholders such as employees, taxpayers, vendors etc. Minority and retails shareholders matter even less and are more likely to be expropriated.
Organisations like Infosys, TCS, HDFC bank and their ilk understand that governance is critical to their ability to raise capital that enables R&D spend, innovate, diversify, compete and grow. Market accords premium valuation to sterling governance.
Small & minority shareholder tend to make greater returns in well governed firms.
The study highlights that a feeble and ineffective governance framework impinges the development of equity markets. Crux study concludes that a major crisis is at hand, especially in the smaller listed companies. It necessitates a rethink; an alternative, more robust regulatory model to ensure sound and transparent corporate governance.
Policymakers must appreciate that in an era of increasing capital mobility governance has a strong influence on resource allocation. It affects the industrial competitiveness, and invariably the growth cycle itself. Governance is key to a vibrant capital market, defining and affecting its functioning in equal measure. Good governance manifests in innovative activities, triggering entrepreneurship, sustainable and active SME sector.
Strong correlation between FDI, growth and governance framework
This is known, rarely understood, and often lost on the government.
The study highlights corporate governance is influenced by legal & regulatory frameworks, characterised by industry sectors and type of productive activity. Historical & cultural factors play a bigger role than most imagine.
Additionally what constitutes good corporate governance practices, and under what circumstances, is difficult for retail shareholders to fathom. This is where role of the regulator can be defining. Without an active & agile regulator governance (however robust) framework tends to get diluted, often melt away.
Policymakers have largely focussed on, and pivot the remedy around misplaced notion of industry annularity, while the converse is invariably true. As an example, governance is more difficult to monitor in organisations characterised by high assets. It may need a different framework.
The key to many challenges facing policy makers is how to develop an effective and holistic framework. While the controlling shareholders must enjoy and secure the associated benefits of ‘controlling’ stake, however governance must ensure that they do not exploit and appropriate excessive rents at the expense of other stakeholders.
The entire ecosystem pays the price.
Our framework does not address the corporate governance problems. It may appear that the policymakers have been trying to solve the wrong problems by leaning on the USA & UK models.
Institutional investors have a skin in the game; a bigger role to play. While they may lack regulatory and coercive power, they have the ability, even ‘power’ to ensure compliance. But more importantly they have the insight to foresee and forewarn. Of late they have gained the voice, and can play a constructive role.
What matters more than how much
While one can sympathise with the regulator as ‘pre-emption’ will imply micromanagement, but they can nevertheless enhance the outcome by widening the scope, and ‘insisting’ on the frequency, quality and reliability of disclosures. More disclosure is not better than less and what matters more than how much.
The Crux study articulates one way to address this is to offer different frameworks, and focused on specific business imperatives of the sectors, necessitating different disclosure drivers. Investors with varying risk profiles may choose the appropriate model (market and company) to invest in, and allow market forces to pick the winners. Investor education and awareness can weed out the unscrupulous. In addition regulatory framework needs to build both capacity and will.
