India, like every other country, has different types of companies, varying in size, complexity, and ownership structure. In every country, standards of corporate governance have been evolving. India follows a rule-based approach to corporate governance, while simultaneously laying down principles. Consequently, failure to follow rules results in many companies facing actions from the regulatory authorities.

Financial Reporting Council (FRC) published the latest version of UK Corporate Governance Code 2024 (the Code), which will be effective from 1 January, 2025. There are various practices suggested in the Code which Indian companies can consider following voluntarily to further improve their corporate governance standards.

1. The Code respects the fact that “one size fits all” will not work for corporate governance. It recognizes that each company has a different context, size and complexity. As a result, enough flexibility is given to companies to “comply or explain”. The Code is not a prescriptive document, but one which promotes thinking among the Boards of companies, while providing guidance on important matters relating to corporate governance. At the same time, it also states that the investors too have a responsibility to look at each disclosure constructively, and not merely find faults with the company.
2. Annual reports have been looked at as documents through which the Board of Directors can communicate with shareholders and other stakeholders, with an intent to use this as a positive opportunity to explain the stance of the Board on various matters and issues. It also promotes accountability, on the part of the Board of Directors, to shareholders who appoint it. The Board has been given an option to provide reasons for any departure from any provision of the Code.
3. While the need for disclosure has been emphasised, the quality of disclosure has been given a lot of importance.
4. Conflict of interest for Board members, and measures for identifying and mitigating it, has been set out in the Code.
5. The Code lays a lot of importance on the culture of a company, and efforts that the Board should undertake for its promotion and absorption throughout the company.
6. There are a number of provisions relating to the workforce. The Code focuses on having a Board member to represent the workforce. Also, a lot of emphasis has been laid on engagement with the workforce, as also having fora for any member to raise any concerns directly to the Board.
7. Stakeholder, including shareholder, communication has been given a lot of importance. Apart from Annual General Meetings, the Chair of the Board, as also those of Committees, are suppose to have regular engagements with major shareholders to seek their views and feedback.
8. There is a provision that in the event of a resolution getting 20% votes against it, the company is to explain what steps it intends to take to consult shareholders to understand the reason behind this negative response. It also has to publish steps taken within 6 months thereafter. The Board also has to indicate the impact of the feedback, and actions taken or new resolutions proposed in the ensuing shareholder meeting.
9. The Code lays emphasis on an Independent Director being the Chair of the Board. In the event that a company wants the Chair to also have executive responsibility, it has to explain the reasons for the same in the Annual report. Further, the role of the Chair, as also the term, has been defined.
10. The Code suggests that companies should consider hiring external firms for finding new Directors. The criteria for ascertaining the independence of an Independent Director includes any remuneration other than director’s fee.
11. The Code suggests at least 50% of the Board should be independent. It also states that having a senior Independent Director, to help the Chair, would add value.
12. The Code states that before considering a person to be appointed as a Director, his/her time commitment for the company’s affairs should be ascertained. Further, there ought to be complete role clarity for the Board and each of the committees.
13. The Code advocates Committee membership to be refreshed periodically. It also specifically states that the Chair of the Remuneration Committee should have been a member for at least a year before becoming the Chair.
14. Diversity, inclusion and equal opportunity have been given a lot of importance, with the Nomination Committee having to disclose its role in promoting gender balance, diversity and inclusion in senior management and their teams.
15. Board evaluation, along with the possibility of an external evaluator every couple of years, has also been touched upon.
16. Audit Committee’s role in ensuring that the Internal Audit is independent, and effective, has to be disclosed in the Annual report.
17. Risk identification of emerging and continuing risks, as also development of a framework to address it, has to be disclosed in the Annual report.
18. Remuneration for executives has to be based on a written policy, which factors in strategy and long-term success of the company. The Code states that when discretion is used, it would have to be explained in the Annual report. ESOPs, with vesting periods of at least 5 years, and a clear policy on the ESOPs, should the person resign or retire, is important. Claw back has to be provided for. The basis for remuneration, as given in the Code, has to be “do not reward poor performance”. Benchmarking to industry standards has also been suggested.
19. Remuneration for Non-Executive Directors has to be based on a written policy which factors in time commitment of the Director and the responsibility shouldered.

While compliance with laws and regulations would be important, voluntary adoption of good practices in corporate governance always helps set higher standards.