Serve Democracy in your companies
That is one way to improve corporate governance and corporate performance
Corporate governance is one of those things that corporate chieftains address either with a fat marker for ticking the appropriate box of compliance or with fancy power-point decks, to be presented to audiences well-versed in the art of suspending disbelief, either by listening to charismatic political monologues or by watching Marvel superhero movies. That is, until some research report comes along that shocks the public and a tenth of the company’s market capitalization vanishes.
There are provisions in the Company law and Sebi’s regulations on listing obligations and disclosure requirements that are meant to secure corporate governance. We do not live in a country where people can openly flout the law, or statutory regulators, and get away with such violation. So, companies comply, at the level of form, but not in spirit. This condition, in which the flesh is strong but the spirit is weak, can eventually, and unexpectedly, lead to major trouble.
Official agencies do not carry out any formal survey of corporate governance in India. Therefore, the recently released survey of how well the top 100 listed entities fare in the area of corporate governance, conducted by Excellence Enablers is worth scrutiny. The outfit is headed by former Sebi chairman M Damodaran, who presumably knows what to look out for.
It is just a survey that neither condemns nor commends individual companies but quantifies how well companies comply on different parameters. Some broad areas of concern emerge.
How much independence for independents?
The composition of boards is an area that Fevicol could explore as a promising avenue to demonstrate strong adhesion. While the ceiling on two five-year-terms does bite, there is little churn among independent directors. This raises questions about how independent these directors are.
The Company Law proscribes stock options for independent directors. This restricts remuneration to a sitting fee and profit-linked commission. The Survey reveals that the number of companies that try to approach the limit on payable commission is very limited. This raises the question: why should talented individuals, whose time is valuable, make themselves available to work as independent directors?
The Survey does not make recommendations, but perhaps it is time to revisit the bar on remunerating independent directors with stock options that align long-term corporate performance with the remuneration for effort to bring about excellence in long-term performance.
Conflict of conflicted interests?
The bar on auditors also performing other services, so as to eliminate the kind of conflict of interest that led to the implosion of Arthur Andersen, remains. But the quality of its observance is fuzzy, thanks to network firms.
Madam director, you there?
The number of women directors depends on the availability of senior women talent, apart from the will to comply with norms. The pipeline of women corporate leaders remains slender.
Blowin’ in the wind
Indian companies are so well-run that there is no scope for whistleblowers to expose anything. Or corporate chieftains work hard to eliminate the presence of any kind of wind instruments in their fiefdom. The Survey found whistleblowing incidents next to non-existent.
Shhh on harassment
Reporting on sexual harassment complaints and how companies dealt with them, and whether they were resolved to the complainants’ satisfaction, remains vague in the data that companies make available in the public domain.
No know-how
Companies rarely provide their directors training on the assorted subjects that have a material bearing on the performance of the sector and the company. How many companies, for example, have taken the trouble to brief their directors about CBAM, proposed by the European Union, right now limited to five sectors but with no guarantee that the coverage of the carbon penalty would stay confined to these five sectors?
Boarding school tactics
Corporate governance has, at its heart, the board. Corporate law and procedure make it difficult to get anybody on board whom the incumbent board of directors does not want. This should change. It should be possible for activist funds to emerge, whose primary purpose is to secure enough voting rights, both by direct investment and by accumulation of proxy voting rights, to place their nominees on company boards.
That would bring to stocks their inherent but rarely articulated and mostly repressed role as vehicles of control. Stocks are primarily viewed, by the investing public, as instruments of monetary reward, and rarely as instruments of control. This needs to change.
Demonstrably democratic
Democracy is not just about voting in elections. It is ultimately about a more even distribution of power in every sphere of our collective existence. In corporate life, few see democracy as a relevant factor. A hierarchy of decisionmaking is essential for functional efficiency, within the company, true. However, whenever democracy is given a chance to play a possible role in the functioning of companies, it produces wholesome results.
Japanese companies initiated the practice of letting workers give feedback on how shopfloor activity could be improved. That led to workers engaging consciously with their work, gave workers more agency and involvement in their work, improving quality and productivity. Workers, in any case, exercise democracy in the working of their unions and associations.
Shareholder democracy is one way to improve corporate governance, and, thereby, corporate performance.