Corporate Governance is not a new concept, but one which has been gaining increasing attention, with a number of scams, frauds and other wrongdoings being reported in companies. With each such incident, the role of the Board, and the need for proper practices and processes, comes to into focus.
India started its journey towards Corporate Governance in 1998 by introducing a voluntary Code for Corporate Governance for listed companies. This Code introduced concepts such as the institution of Independent Directors (IDs) for the first time. However, in early 2000s, it was decided some provisions relating to Corporate Governance needed to be made mandatory. Clause 49 of the Listing Agreement, which came into effect from December, 2005, was thus introduced for listed companies. Most of the provisions given in the Code as also the recommendation made by the Kumar Mangalam Birla committee, set up at that time, found their way into Clause 49. The major provisions included provisions relating to IDs, strengthening of Audit Committee (AC), constitution of a Shareholders Grievance Committee, improving the quality of disclosures to stakeholders, including those relating to financial information, Related Party Transactions (RPTs), and the like.
Over the years, a number of committees have been set up by MCA and SEBI, and each one of them has made a number of recommendations relating to Corporate Governance. Some of the key recommendations include changes in relation to the appointment of auditors, determination of audit fee, restrictions on non-audit fee, presentation of a true and fair financial statement, enhancement in scrutiny and disclosure of RPTs, risk management and Director compensation.
The Companies Act, 2013, which came into effect on 1 April 2014, had several new provisions aimed at enhancing Corporate Governance standards in companies, not limited to listed companies. These included provisions relating to mandatory appointment of women Directors, prohibition of non-audit services, Corporate Social Responsibility, Schedule IV for Code of Conduct for IDs, prohibition of stock options for IDs, one person company etc. In December 2015, Clause 49 was subsumed into SEBI LODR Regulations, 2015, which had provisions relating to appointment of women IDs, strengthening of ACs, RPTs, disclosures, and the like.
Over the years, a number of amendments have been made to both the Companies Act, 2013 and SEBI LODR Regulations, 2015, mostly in response to some event or the other that occurred in the corporate world. There has been an increased focus on RPTs, risk management, disclosures in annual reports and on the company’s website, enhancement in the roles of the internal auditor and secretarial auditor etc. There was also an attempt to mandate the separation of the the posts of Chair and MD. This provision continues to be voluntary. There has also been an enhanced disclosure in the form of Business Responsibility Report (BRR), which aims at disclosing a company’s efforts in the ESG space.
In a number of aspects, the spirit of the law, and not just the letter of the law, has started getting increased attention. Diversity of Boards, not restricted to gender, is being focused on by good companies. Well governed companies are no longer limiting themselves to only compliance, but are moving towards good practices. Having an AC comprising all IDs, specific offsite strategy meetings, ACs meeting the auditors without the presence of management, Stakeholders Relationship Committees focusing on stakeholders, and not only on shareholders, are some of the commonly followed practices. Vigil mechanism has been strengthened, and more transparency has started informing Board processes.
Institutional investors are becoming increasingly active in performing their stewardship role. Mutual funds and insurance companies have to publish their stewardship policy on their websites, and have to mandatorily disclose their voting patterns They have also been increasing their participation in AGMs, but this can further improve.
Proxy advisory firms too are gaining importance in the past few years. They seem to be asking relevant questions relating to Boards. They have been able to influence the decisions taken by both institutional and retail investors. However, problems will arise when their activism becomes adventurism.
Post the lockdown, presumably as a response to the pandemic, Risk Management Committees have gained importance, with their composition being strengthened, and the number of their meetings being increased. Companies have also started focusing on areas of risk such as Business Continuity Planning (BCP), cyber etc. Data privacy is also being discussed by a number of Boards. ESG, has become a staple on most agendas. Sustainable growth is being given increasing importance.
The current trends are likely to continue, with more and more companies adopting good practices, which go beyond compliance. Boards of the future would have to contend with the newer needs being thrown up post the initial phase of Covid. ESG, with focus on E and S, would be important as stakeholder democracy continues to rise, and express itself.
Prerna Mohan