Corporate Governance & What You Should Know About It

The finest companies across the globe differentiate themselves from the undistinguished ones by adopting high standards of corporate governance. Even so, authoritarian regulations have placed an increasing demand on companies to be more responsive to investors, to engage shareholders and protect minority interest. Also, corporations themselves are realising the value robust governance standards have on their brand and long-term performance.

The reality is that corporate governance is not just another exercise to meet regulatory requirements, but a business imperative. All companies — big and small, private and public, new or established — need to be concerned about, and stand to benefit from, strong corporate governance.

Headed towards it’s goal of identifying the best and most effective practices in India Inc.’s boardrooms across industries, Korn Ferry associated with NSE to conduct a survey to gain useful insights pertaining to the corporate governance scenario in over 100 NSE listed companies. In essence, this study focuses on two parameters- selection of IDs and succession planning.

Speaking about the study, Vikram Limaye, MD & CEO, NSE, said, “NSE is focused on enhancing governance standards and best practices in listed companies and boards and conducted a study in collaboration with Korn Ferry to help identify the best practices prevalent among Indian companies in various areas. We received active participation from companies in this regard and hope to use the results of this study to further strengthen the governance framework and recognize companies that are setting high standards of governance.”

Talking about the collaboration with NSE, Navnit Singh, Chairman and Managing Director - India, Korn Ferry, said, “We are excited to have partnered with NSE for a unique survey that throws light on best practices in India Inc.’s boardrooms. A well-governed board has a strong positive influence on an organization's performance and value creation for employees, clients as well as other stakeholders. Our survey aimed to understand key corporate governance practices across listed companies that constitute large cap, mid cap and small cap spectrum of the market. This outreach certainly helped us gain a window into boards that lead in India with some of the finest real-time corporate governance practices.”

How the study unfolded

When KF and NSE collaborated for this study, the first of many steps was to identify the most effective method of conducting and analysing the survey. An online survey was thus launched and shared with all NSE listed companies. However, this approach did not garner adequate response and the survey was relaunched using PRIME Database services. Alongside administration over email, the survey was also administered in person by partners with MDs, CEOs and other independent directors.

The study consisted of 9 key practice areas that branched out into best practices in the said area. The companies were made to choose the degree of agreement with the existence of each board practice in the organisation. Subsequently, they were made to pick the best practices from a list of board practices relevant to the key areas as well as highlight their own unique practices, if any.

In order to understand the best and unique board practices across industries, it was imperative to have a well-balanced mix of companies belonging to different sectors in the sample set. A majority of the participants came from the manufacturing industry. There was a good representation from the technology, chemical, pharmaceuticals and biotech, Financial Services and Insurance, and F&B sectors. Apart from these, companies from oil & gas, agriculture, construction, banking, healthcare, business services/consulting, automotive sectors etc. were also part of the survey.

Findings of the Study

According to the study, an overwhelming 80% of respondents confirmed that independent directors are hired for specific skills and qualifications and almost 70% confirm that the roles of the IDs are vividly communicated to them during on boarding. A smaller chunk confirms having nomination committees to select these IDs. These committees place accountability for hiring the most suitable people for the job on the committee. It has been found that this leads to higher focus on following due process to assess, hire and on board the right members.

Additionally, a significant number of the respondents reported having a robust process for assessment and selection of board members. An interesting practice that emerged was that of having each board member nominate and present the case for separate candidates and then the nominations committee follows a laid out procedure for evaluation and selection of each candidate. There are also companies that hire external agencies for an annual assessment of directors. The findings of this study are shared with the chairman of the board and a summary is shared with all the members. This is followed up by a plan to fill gaps if any.

With over 90% respondents nodding in the affirmative, the most prevalent board practice in India Inc. is having a well-defined process of selection for Independent Directors. Given the increased scrutiny on legal and ethical compliance of boards, and the enhanced role of board members in steering organisations away from risk and towards greater compliance and ethical behaviour, the profile of IDs have become extremely crucial. While we see an increase in the rigour in selecting IDs in India, there is also tremendous room for improvement.

In conclusion, succession planning is a crucial boardroom practice and the company’s strategy must clearly draw the range of skills most required for the board. A continued process of reviewing and identifying board needs should be priority and an early start must be made on each specific recruitment. The chairman’s and CEO’s succession should be planned judiciously drawn out over a period of time while also taking anticipated board changes into consideration. With a multifaceted approach to this practice, the objective to predict a future leader’s likely success in the context of a particular organisation would be possible and very well achievable.