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Issues in Corporate Governance practices in India that went unaddressed in 2023

There has been considerable improvement in the corporate governance standards in India. Some aspects of corporate governance that need improvement in 2024, keeping the letter and the spirit of law in mind, are:

  1. Quality of disclosures – India follows a disclosure-based regime. Both the Companies Act, 2013 and SEBI LODR Regulations, 2015 lay emphasis on disclosures to stakeholders. For a disclosure-based regime to be successful, such disclosures should be timely, complete and correct. While many companies go through the motion of disclosing, the quality of such disclosures needs significant improvement. This also holds true in the case of explanatory statements, sent to shareholders for general meetings. Such statements sometimes do not contain essential details.
  2. Transparency– There should be transparency between a company and its investors. However, a number of companies choose to not be transparent about their affairs.
  3. Avoidance of conflict of interest – SEBI LODR Regulations, 2015 state that instances of conflict of interest of Directors and senior management must be identified and managed. Conflict of interest arises when a person chooses personal interest over that of the company. Some individuals however choose not to disclose such instances, and companies do not identify such instances proactively.
  4. Separation of posts of Chairperson and Managing Director – SEBI LODR Regulations, 2015 states that separation is of the two posts is desirable for promoting corporate governance. There was a proposal to make this mandatory, but that did not get implemented. Chairperson is the Chair of the Board, and Managing Director is head of management. The Board has to hold the management accountable. For this to be meaningful, the same person should not hold both the positions.
  5. Understanding the difference between ownership and management – When ownership and management reside in the same set of individuals or entities, distinguishing between the two can be difficult. For a company to be effectively run, it is important that this difference is understood and captured in the structure.
  6. Board composition – Some sectors, such as the public sector, have been grappling with the problem of inadequate Independent Directors on the Boards of companies. This makes their Boards structurally and functionally sub-optimal.
  7. Gender diversity on Boards – Having only one woman Independent Director, in the name of gender diversity, is wholly inadequate. Boards and senior managements should actively focus on getting more women to be Board members.
  8. Age Diversity – While some younger Independent Directors have been appointed on Boards, this number is small. With advancements in technology, and with more new age companies being listed, it is important to consider the appointment of younger Directors on Boards. This would also bring fresh thinking in boardroom discussions.
  9. Board committee functioning – A lot of important items are dealt with by committees of the Board. It is therefore important that committees are properly composed, and with proper terms of reference. Adequate time should be given to the meetings of the committees, and there should be updates given by committee Chairpersons to the Board, post the meetings.
  10. Risk management – Post demonetisation and Covid, a number of companies have understood the importance of proactively identifying risks. What is also important is to continually update risks that the company can encounter. Efforts to identify and mitigate or manage risks have to be continuous.
  11. Benchmarking of remuneration– It is important to compensate senior management properly and adequately. Remuneration should be a mix of fixed and variable pay. ESOPs too should form a part of the total compensation. Some companies however do not consider industry benchmarking while deciding on compensation standards. Further, not having a component of variable pay or not having ESOPs often result in senior management not being invested in the long-term performance of the company.
  12. Succession Planning – Every company should have in place a robust process for succession planning, both for the Board as also for key positions. This is the role of the Nomination and Remuneration Committee, and in turn of the Board. Unfortunately, many companies pay lip service to this. 2024 would see a large number of changes in Independent Directors since two terms of 5 years each would come to an end for many of them. Very few companies proactively onboarded new Independent Directors, to enable continuity with change.

Ushma Patel Jain