An appetite for stronger boards

In the third century BC, Kautilya, a political adviser in the capital of the Mauryan Empire and the pioneer of political science in India, set out the four duties of a king: raksha, or protection; vridhi, or enhancement; palana, maintenance; and yogakshema, safeguarding.

One joint report from the OECD, the World Bank and Asian Development Bank, entitled Corporate Governance and the Empowerment of the Investors, applies this framework to corporate governance in India, where the king represents the chief executive, the subjects the shareholders and the state the corporation.

The responsibilities of Kautilya’s model ruler are no different from the responsibilities of Indian business moguls today as the country strives for better corporate governance, the report suggests.

In India – as in many of Asia’s emerging markets – most companies are owned and managed by controlling shareholders, or “promoters”, often founders of the business or an industrialist family. Some 95 per cent of listed companies in the country are family-owned, according to research from KPMG and the Confederation of Indian Industry.

Where corporate governance in the developed world tends to be about conflicts of interest between owners and management, in India the tension is between controlling and minority shareholders. As a result of the extensive informal powers of controlling shareholders – combined with the continuing problem of corruption in India – independent directors of company boards have traditionally failed in their duty to provide a check on decision-making and a voice for minority interests.

Recent moves at some high-profile companies, however, have whetted the appetite for change, showing that Indian boards are taking action on poor performance. In June, for example, directors at Infosys brought co-founder Narayana Murthy back to the helm as the information technology group’s earnings growth waned. While some observers questioned the wisdom of restoring an elderly figure from the business’s glory days, a vocal board was at the heart of the decision-making.

“There has been some positive change and people have started to realise the value of having a good and activist board,” says Arvind Singhal, chief executive of Technopak Advisors. “There is a trend that boards are actually becoming far more independent and many of the board members are looking at themselves as custodians of shareholders.

“It’s about board members themselves realising they have a responsibility not to the promoter only but to the stakeholder. And I think that awareness is improving.”

Ajay Saraf, head of investment banking at ICICI Securities, also detects signs of improvement: “With the responsibility given to independent directors, they’ve started to question and not just have a cup of tea and go. I see that change happening.”

Until now, part of the problem has been that where a controlling shareholder directs governance – aside from some prominent examples – they of­ten select a passive board of “yes men”. Indeed, the boardroom could be mistaken for the promoter’s birthday party, full of family and friends rather than autonomous professionals.

Amit Tandon, founder of Institutional Investor Advisory Services, compares the way Indian business moguls choose independent directors to drawing a venn diagram: “They have one circle containing all the people they know and another circle containing the people they think will cause the least trouble. And the intersection is the narrow population they choose from.”

Investment brings greater scrutiny

As foreign institutional investment in India has increased, it has brought a greater level of scrutiny.

The past month has seen two companies’ share prices suffer following decisions that raise questions about governance and the protection of minority shareholders’ interests.

Shares in Ambuja Cementshave fallen following a controversial reorganisation plan with Holcim, its Swiss parent group.

Similarly, while banking share prices have fallen generally, Yes Bank has also been affected at least partly because of a bitter court dispute with Rana Kapoor, the bank’s co-founder. Mr Kapoor is opposed to electing the daughter of his late partner and brother-in-law, Ashok Kapur, to the company’s board.

This is aggravated by the wider culture of corruption in India. It is considered more difficult to run a clean ship in a sector reliant on the government – say property, where land ac­quisition is an issue, or telecommunications, where licensing famously led to corruption. “We live in a country where the levels of corruption are quite ex­traordinary,” says Ravi Venkatesan, the former head of Microsoft India who now sits on the board of Infosys. “It doesn’t stay confined to one section, like the government. The whole well has been poisoned.”

The problem also lies in the attitudes of the independent directors, many of whom sit on numerous boards with limited time to devote to each business.

Dinesh Kanabar, deputy chief executive of KPMG in India, has a wry term for such “yes men”, whose in­ter­est rarely extends beyond the complimentary refreshments at meetings: “The tea, coffee, cashew nut director”.

By contrast, he holds up the example of Tata Group, India’s largest company, where an exceptionally progressive founding family has developed a reputation for good governance. “If you have an independent director sitting on the board of Tata, it is a two-way street,” Mr Kanabar says. “First, Tata will never compromise on the independence of the director and the director will refuse to be compromised.”

India still has a long way to go in corporate governance. A panel, headed by Kumar Mangalam Birla, the chairman of Aditya Birla Group who has led a study on corporate governance for the Securities and Exchange Board of India, was assembled to identify the 10 best boards in India in 2012. But it found only five candidates that made the cut.

There is a range of factors, however, that is slowly driving progress. First, foreign institutional investment has increased dramatically and brought a greater level of scrutiny. Sanjay Agarwal, head of investment banking at Deutsche Bank, says these investors are responsible for much of the improvement in corporate governance. “They can be brutal on the stocks of companies that are not governed so well,” he says.

Similarly, the global economic downturn has also been a catalyst for change, as investors see that weak corporate gov­ernance leaves companies fragile. “After the downturn, where public in­vestors lost capital, corporate governance became their top box [up] from the fifth or sixth item on their checklist,” says Ajay Saraf, head of investment banking at ICICI Securities. “Earlier, the main box on the checklist was growth.”

Companies will have to watch corporate governance standards if they want to access overseas credit, too.

Another force for change is new regulation. This month India’s upper house of parliament passed the Companies Bill 2012. If enforcement is as hard-hitting as the letter of the law, the new legislation will introduce dramatic changes, limiting the number of boards one person can join and enforcing rotation in auditors.

Finally, as India’s business community travels abroad for work and study, a generation of non-resident Indians are returning to senior positions or directorships in Indian companies, bringing a new set of governance standards with them.

“The next generation of entrepreneurs has global exposure and education and wants to run business professionally, to high standards of governance,” says N Venkatram, managing partner for audit at Deloitte Haskins and Sells.