Why should these principles matter and how do they affect Indian companies?
Introducing the updated principles, OECD Secretary General Ángel Gurría said: "Today, half of the world's 50,000 publicly-traded companies are listed in emerging markets. And since 2008, companies from emerging markets have attracted more than half (51 per cent) of all equity capital raised in the world. This is a sea change compared to the 1990s, when non-financial companies from emerging markets only raised 14 per cent of all equity capital." He then went on to add that "the future prosperity of (US) retirees will to a large extent depend on the performance and integrity of corporations, who are operated and traded in a great number of countries worldwide".
The Indian market is witness to this change. A brokerage firm has estimated that foreign institutional investors own 23 per cent of the top 500 companies through investments aggregating $335 billion. Indian firms will continue to need capital to grow. Increasing investor trust in our regulatory regime and in our companies will ensure that global long-term capital continues to flow. Adhering to these principles will matter.
There are six G20/OECD Principles, each dealt with as a chapter: supervisory framework, shareholder rights, institutional investors and markets, stakeholders and corporate governance, transparency and disclosure, and board of directors. The chapters talk about the need for the principles, the best practices and finally the OECD's take on the principles and its message to regulators. A bit more colour is provided below.
The first principle highlights the need for a corporate governance framework and stresses its role in promoting fair and transparent markets. It seeks the framework to be consistent with the rule of law and the division of responsibilities among supervisory, regulatory and enforcement authorities. It talks about empowering regulators through a fixed tenure, independent of the political cycle.
The second principle deals with shareholder rights. Basic shareholder rights should include secure methods of ownership registration and their transfer, access to relevant and material information on the corporation on a timely and regular basis, and the right to vote in shareholder meetings. Regulation regarding voting on related party transactions that found a way into the Companies Act, 2013 is dealt with in this chapter.
The third principle - an addition to the 2004 principles - deals with the role of institutional investors in fostering good corporate governance and their fiduciary duties. It calls on all shareholders of the same class of shares to be treated equally and seeks prohibition of insider trading. Highlighting the role of proxy advisors, this chapter avers that they are among the most relevant from a direct corporate governance perspective.
Not just investors but lenders, employees, suppliers and customers also play a vital role in the success of corporates. The fourth principle urges the corporate governance framework to recognise the role and primacy of the various stakeholders.
The fifth principle deals with issues of transparency. The best way to increase public trust is through adequate and timely disclosure. This is the area with the most dramatic changes. The focus also changes from periodic to ongoing disclosures. This chapter urges companies to disclose not just their financial results but also material developments that impact their operations. It further asks of the board to disclose the estimates used in preparing the financial and operating results and talk more openly about inherent risks, so as to give investors a clear understanding of the board and management's business judgement.
The sixth principle emphasises the roles and responsibilities of the company's board. It expands the role of the board from monitoring to guidance and from risk management to providing strategic guidance. It highlights the need of various management committees by listing their advantages.
Since these are principles, they provide the required flexibility to regulators, who can take into account a company's size, ownership structure, geographical spread and stage. They also give regulators the leeway to roll these out as codes rather than hard regulations.
Indian regulations have imbibed a large part of these principles and diffused them into the system over time. India was the first Asian economy to put forward a comprehensive code of corporate governance, when in 1995 the Confederation of Indian Industry appointed a task force to draw up a voluntary code of corporate governance. Since then, there have been six committees under the aegis of the Ministry of Corporate Affairs or the Securities and Exchange Board of India (Sebi), recommendations from most of which found a place first in the listing guidelines; then in 2014 in the Companies Act, 2013, and in the recently notified Sebi (Listing Obligations and Disclosure Requirements) Regulations, 2015.
While India has been an early adopter of the OECD principles, it has also been proactive in setting new standards. Regulations relating to contribution of profits to corporate social responsibility and mandating women to be on boards are unique to Indian regulations. As the OECD and other markets progress on setting benchmarks for good governance practices, India will likely keep up. But regulations are just one step in the right direction; implementation is key. For that, Indian companies must commit themselves to adopting a strong governance framework. Without that, India will soon lose its sheen as an investment destination.
The writer works with Institutional Investor Advisory Services of India Limited.
The views are personal
The views are personal