Can business behave better?

Hardly a week passes nowadays without a new corporate governance-related issue roiling the markets. The ripples created by IL&FS and ICICI Bank had hardly begun to die down when news broke of Jet Airways’ principal lender, State Bank of India, ordering a forensic audit of the troubled airline’s accounts for the past few years. Even the august Reserve Bank of India’s board of directors, which met last week under new Governor Shaktikanta Das after the sudden and tumultuous exit of Urjit Patel, reportedly felt that governance standards at India’s central bank, which also doubles up as the banking regulator, needed some improvement.

The trouble is, most of the solutions tried earlier appear to be not working quite as expected. Over the years, India has taken a number of steps to improve corporate governance and protect the interests of investors, lenders and other stakeholders. The Companies Act, one of the most massive pieces of legislation in the world, has been comprehensively reworked. When it comes to accounting and financial reporting, the Indian standard, IndAS, has been vastly tightened and brought more in line with global best practices, making assessments of corporate assets and liabilities much fairer and more transparent than they were under the previous Indian Generally Accepted Accounting Principles (IGAAP) regime.

When it comes to listed entities, the stock exchanges, which also function as first level regulators of compliance, too have tightened corporate governance norms. From defining the role, power and functioning of independent directors in a company’s board to even pushing affirmative action and gender parity by mandating a minimum number of women directors, policymakers and regulators have used both legislative action and regulatory direction to try to strengthen corporate governance.

Yet clearly, all this, while helping, has not managed to actually solve the problem. From Vijay Mallya to Nirav Modi to Ravi Parthasarathy, “strong” promoters/leaders have managed to pretty much bypass all these checks and balances in pursuit of their own goals, till the point of no return is passed and the whole shebang collapses. As the Satyam saga demonstrated, when the chief executive and a cabal of executives and auditors actively collude in fraud and start lying to their boards, investors and creditors alike, it is pretty much impossible to detect trouble in time, let alone prevent it.

Perhaps it is time to try another approach. One of using carrots, not sticks. Ultimately, companies – and the people who run them – understand the language of money best. So why not try to build in a financial incentive to better corporate governance?

The Brazilian example

The Brazilian stock exchange Bovespa, did precisely that. Back around the beginning of the millennium, Brazilian exchanges resembled Indian exchanges a great deal. There was little protection for minority shareholders and governance lapses were rampant. Worse, there was investment flow to the U.S. – wherever a Brazilian company was cross-listed in an U.S. exchange, investors preferred to invest and trade there, because of perceived better protection and compliance standards.

Its answer was to create the Novo Mercado – literally, new market — a premium board where companies could voluntarily list, but had to comply with enhanced corporate governance standards. Some of the key listing requirements in the Novo Mercado include: the share capital must consist only of common voting shares; same conditions provided to majority shareholders in the transfer of the company’s control will have to be extended to all shareholders (100% tag along); in case of delisting from Novo Mercado, holding of a public tender offer (PTO) for a fair price, with minimum acceptance quorum of one-third of the free float shareholders; companies must structure and disclose the process of assessment of the board of directors, its committees and the executive officers.

There are more but you get the picture. Although similar in many ways to Clause 49 of the Listing Agreement between a company and a stock exchange on which it lists its shares (coincidentally, also introduced in 2000), the Novo Mercado provisions were more stringent and gave more powers to the exchange to delist a share for non-compliance.

In the years that have passed, there have been several empirical studies which have demonstrated that over time, such a listing has served to bind a company to better corporate governance behaviour, has attracted shareholders willing to pay a premium for better disclosure, and over time, reduced cost of raising capital for participating company.

Back home, a research paper published by NSE (Corporate Governance and Market Value: Preliminary Evidence from Indian Companies) concluded that there was a link between investor behaviour and corporate governance practices and that companies with better corporate governance scores did manage to attract a premium.

The NSE is reportedly mulling a premium board to try and attract better-governed entities to try and list on it. This is long overdue given that many major global exchanges already have one. And given that SEBI has just allowed Indian companies to directly list abroad (without listing in India first), it is high time India got its own A List going, to prevent a flight of quality paper from Indian shores.

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Printable version | May 14, 2021 3:27:52 AM | https://www.thehindu.com/opinion/op-ed/can-business-behave-better/article25753846.ece

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