A Recent Corporate Governance Survey

Business Standard reports a recent study by Grant Thornton-FICCI of corporate governance practices in Indian companies. The “India 101-500 CGR 2009 was designed to analyze corporate governance practices at ‘mid-market’ listed companies in India. The review methodology was based on a survey to gauge the nature and extent of corporate governance practices and approximately 500 companies across various sectors were targeted to participate in the survey.”

A significant finding of the study relates to the method of appointment of independent directors. The report states:

“A majority of the respondents (56%) felt that an ideal board structure should have between 25% and 50% as independent directors. What appears to have come out strongly is that the bane of the issue relating to the availability of independent directors is in the process adopted by companies to appoint independent directors. A majority of the respondents (56%) disclosed that they did not have a nomination committee to lead the process of appointing independent directors in their companies.”

This study empirically verifies and confirms the assertions we have previously made and covered on this Blog that changes are required to the manner in which independent directors are appointed on Indian companies. While nomination committee is not mandatory in India, one of the items on the reform agenda could be to make them mandatory as they would instill greater independence of those directors from the promoters. However, while reforms are being considered (particularly in the wake of the Satyam episode), it is perhaps not too tall an order to take into account other mechanisms as well, although they may be perceived to be somewhat radical in nature. For example, as noted earlier, corporate governance experts have opined as follows in the context of appointment of independent directors:

“More fundamentally, there needs to be a re-evaluation of who appoints independent directors. Under the current system, they are appointed by the shareholder body as a whole, which is often considerably influenced by the controlling shareholder. What is required is a reform to consider other methods of appointing independent directors. For instance, they can be appointed by a majority of the minority shareholders, whereby the controlling shareholders do not have a say on the matter. Alternatively, there may be proportionate representation on boards of listed company where all shareholders have some level of say in appointment of directors and that the board is not dominated by controlling shareholder nominees. For example, in such a system, the minority shareholders obtain the right to elect such number of directors in proportion to the percentage holding of such minority shareholders. [Note: The system of proportional representation is already available under the Companies Act, in Section 265, but is only optional]”

I have also developed on some of these aspects further in the article A Cautionary Tale of the Transplant Effect on Indian Corporate Governance (pages 17-18, 22-23).