It has reported that corporate governance in India’s best companies has always matched up with the best in the West. The good news is that emerging, family-run companies are also picking up best practices in governance.
This transformation is driven by self-interest; since promoters realise that a reputation for good governance not only boosts a company’s valuation but also attracts better partnerships and talent. “The board is the custodian of the company’s image, brand, reputation,” said Subodh Bhargava, chairman, Tata Communications, “It’s no longer just about increasing the family’s wealth.
Companies today know they have to weather threats to their survival.” Lalita Gupte, chairperson, ICICI Venture Funds Management Company, pointed out that improvements are being driven by joint venture partners and private-equity firms, who are providing international perspective and asking more questions.
“Independent directors need to challenge the management. They need to devote time beyond board meetings.
Well governed companies should have least three offsite meetings a year.” Charles Tilley, CEO, Chartered Institute of Management Accountants, agreed that the old two-hour board meeting mind-set has to change because a Board meet is no longer about passing financial statements.
“There was a time when book value accounted for 80% of market capitalization — today, it’s only 20%.
Brands, people, relationships now account for 80% of a company’s value and they need to be discussed and reported.” In the West, boards have recently been spending a disproportionate amount of time discussing executive compensation.
In India, the topic that takes up the most time is related party transactions, always a thorny issue with ‘groups’, where the promoters run a number of companies, both listed and unlisted. Mr Bhargava said that if the company management tries to push through a decision that goes against minority shareholders, independent directors should insist on recording their dissent. “In such cases, the management usually backs off,” he said.
Boards are only as good as the people on them and the panelists agreed that there is a lacunae in the process by which companies recruit independent directors.
“Indian companies don’t conduct an extensive search,” said Kalpana Morparia, CEO, JP Morgan India. The practice is to select from a list of people the promoters are familiar with. This shuts out many good people, especially women.”
Here, the panelists naturally turned to the moderator, Anjali Bansal, managing director of executive search firm Spencer Stuart India, who agreed that headhunters certainly need to help corporates recruit independent directors for their boards.
The trend of advisory boards
Alongside statutory Boards, there’s a trend of corporates creating advisory Boards, consisting of eminent people whose role is to act as a think tank and provide guidance to the company management. “They already play a big role and we are going to see more of them in the future,” said Amit Sharma, president (Asia), American Tower Company.
The concept is not for everybody though. Arun Nanda, director, Mahindra & Mahindra, said he doesn’t see the Mahindras ever creating parallel advisory Boards, though he does see the logic, especially for MNCs, unlisted and delisted companies.
“It’s a new concept,” he said. “Those who do not want the risk and the nitty-gritty associated with statutory boards might join advisory Boards, where the obligations are less and remuneration is higher.”
Statutory boards are generally expected to provide sage counsel to the management, but when they don’t, advisory boards are an alternative. “Managers need a sounding board,” said Sanjeev Aga, former managing director of Idea Cellular. “As a CEO, I would look for new perspective and if there’s an absence of that kind of input from the statutory board, shareholders may like to institutionalize it by creating an advisory board.”
In an ideal world, the statutory board should act as an advisory board said Deepak Satwalekar, former managing director of HDFC Standard Life, but that doesn’t always happen, since board members are not truly engaged. Mr Sharma predicted that only the top 50 companies will be able to get directors of stature, the rest might have to resort to creating advisory boards.
Mr Satwalekar declared that given a chance, he would happily quit all statutory boards that he is on and join advisory boards, which prompted moderator Anjali Bansal, managing director of Spencer Stuart India to ask what would happen to statutory boards in that case.
Kuldip Kaura, managing director & CEO of ACC provided a different perspective, saying that advisory boards might have a special role to play when it comes to triple bottom line responsibility.
Private equity and its impact on corporate governance
Private equity (PE) firms are well placed to improve corporate governance norms in the companies they invest in and most of them have been playing that role in India. “We’ve been doing the due diligence that regulators should be doing. We even check on the financial statements signed off by accounting firms,” said Rahul Bhasin, managing partner, Baring PE Partners India.
PE firms themselves are strictly regulated by the laws of their own country and need to be wary of investing in bad companies. “We conduct forensic diligence,” said Neeraj Bharadwaj managing director, Carlyle India Advisors.
“We don’t just go by what the management says, we talk to ex-employees, competitors. It affects our returns since a well governed company is valued at a premium.”
Referring to real examples like Subhiksha and Liliput, where PE firms have lost out majorly, Bala Deshpande, senior managing director of New Enterprise Associates said that the PE business is about managing the risk-return ratio, though it often degenerates into a blame game if there is a blow out.
“Whatever the regulations, greed will find a way to break out. Look at the cases of fraud in the US, Canada,” she said.
Be that as it may, good governance can be a win-win game, since it allows entrepreneurs to raise money at a premium and also allows PE firms to exit at a higher valuation. Sharad Sanghi, managing director & CEO, Netmagic Solutions, said he often consults with his PE investors and they have played a positive role in management.
For example, when his company wanted to lease office space with its limited capital but the landlord insisted he would rather sell, Sanghi had the option of using his own funds to buy the property and then renting it back to the company.
“It was a kosher solution but I didn’t do that because it would have been perceived as bad corporate governance.
In the end, we were acquired at a high valuation because of our governance practices,” he said.
The role of shareholder activism
When a company’s market valuation languishes because of bad management or promoters blatantly take self-serving decisions, normally passive shareholders can turn into activists, forcing change. “It’s a new trend in India which will continue to escalate,” said OP Bhatt, former chairman, State Bank of India.
“It can take the form street activism of the Anna Hazare kind, or it might be more discreet, where activists talk with the management behind the scenes and it is not reported.”
Punita Sinha, founder and managing partner of Pacific Paradigm Advisors gave the example of a mutual fund she managed in the US, where the NAV was much higher than market price and activists forced the fund to buyback units in order to reduce the discount and even dissolved schemes in some cases.
“When a company is seen to be undervalued, activists believe asset sales or a change in management can increase value in the short term,” she said. But then again, it’s a rare promoter who might take cognizance of small investors.
Shareholder activists need to have capital and clout to be heard. “They need heft so that management will respect them.
There’s a lot of research out there (of bad corporate governance) but unless it is backed by people who have shareholding, there’s no activism,” said Ramraj Pai, President, Crisil Ratings, which rates companies on corporate governance. The company has done less than 40 corporate governance ratings since inception.
Though they have the heft, institutional investors, both domestic and foreign, rarely seem to play an activist role in India, though they have much at stake. “FIIs especially tend to vote with their feet rather than persuade the promoter. But then, what can they do when the promoters owns 75%?” said Vimal Bhandari, managing director & CEO of Indostar Capital Finance.
In a session enlivened with numerous examples, the panelists agreed that the publicity generated by street activism can do long term harm and is usually best avoided. “If it’s an internal quarrel, you don’t want all the neighbours to know,” said Mr Bhatt.
Going one step further, Mr Bhandari said there are too many self styled shareholder activists in India: “Their antecedents are not disclosed, their data sources are questionable. They create a cacophony that undermines the real issues.”
This prompted a reaction from audience members like JN Gupta, managing director of Shareholder Empowerment Services, who said organisations like his were as qualified as any to engage in activism.
(Economic Times, 11 October 2012)