Enhancing investor involvement in corporate governance

Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. The main objective of corporate governance is to ensure accountability, fairness, and transparency in a company's operations, and to protect the interests of all stakeholders, including shareholders, employees, customers, and society at large. In India, corporate governance is governed by various laws, regulations, and guidelines issued by regulatory authorities such as the Securities and Exchange Board of India (SEBI), Ministry of Corporate Affairs (MCA), and other financial regulators.

SEBI has introduced various regulations to improve corporate governance practices, such as the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, which require listed companies to comply with various corporate governance norms, including the composition of the board of directors, audit committee, and disclosure of related party transactions. The Companies Act, 2013, is another important law that governs corporate governance in India. It mandates that certain companies must appoint independent directors, establish an audit committee, and have a whistle-blower policy in place. In recent years, there has been increased focus on corporate social responsibility (CSR) in India, and the Companies Act, 2013, has made it mandatory for companies to spend at least 2% of their average net profits on CSR activities. SEBI has recently approved the regulatory framework for ESG (Environmental, Social and Governance) disclosures, ratings and investing.

A society’s ability to be just and fair is judged by how it treats the minorities across any segment. Minority and retail shareholders are often at a disadvantage compared to large institutional shareholders, as they may not have the resources or influence to influence corporate decisions or protect their rights effectively. The financial regulators can also promote investor education and awareness campaigns to educate minority and retail shareholders on their rights and how to exercise them effectively. This will help empower them to engage with the company and hold the management accountable for their actions.

The markets regulator, SEBI, has much improved consumer protection. SEBI has established an investor protection fund to compensate retail investors for losses suffered due to fraudulent or unfair practices by market intermediaries. It also has an investor grievance redressal mechanism to address complaints and grievances of retail investors. This includes an online grievance redressal portal and a toll-free helpline. It is mandatory for all market intermediaries, including brokers, to provide investor education to their clients. This includes information on market risks, investor protection, and other related issues.

This however cannot act on the aspects of investors’ FOMO and greed, both of which can lead investors to make irrational investment decisions, which can result in significant losses. The securities market is inherently risky, and investors must take a cautious and informed approach to investing. it is the responsibility of individual investors to exercise due diligence and make informed investment decisions based on their risk profile and investment goals. Yet the regulator gets unfair blame.

In India, shareholder activism is still at a nascent stage, but it has the potential to improve corporate governance standards in the country. By engaging with the management and holding them accountable for their actions, shareholders can help prevent fraud, mismanagement, and other governance failures. Shareholder activism refers to the active participation of shareholders in the governance of a company, with the aim of influencing the management's decisions and actions. Shareholder activism can take various forms, including voting at shareholder meetings, filing shareholder resolutions, engaging with the management, and launching proxy fights. Shareholder activism can also help promote transparency and disclosure, as companies may be more likely to provide relevant information to shareholders to avoid potential conflicts or legal action. Moreover, shareholder activism can help promote long-term value creation and sustainability, as shareholders can push for measures that prioritise the interests of all stakeholders, including employees, customers, and the community.

SEBI can encourage the growth of proxy advisory firms, which provide independent research and analysis on corporate governance issues. This will enable shareholders to make informed decisions and exercise their voting rights effectively. Proxy advisory firms are independent research firms that provide recommendations on how institutional investors should vote on various corporate governance issues, such as executive compensation, board composition, and related-party transactions. In India, the proxy advisory industry is relatively new but growing rapidly, and there are a few prominent firms in the market. By providing independent research and analysis, these firms enable institutional investors to make informed decisions and exercise their voting rights effectively.

SEBI can mandate companies to disclose more information on their governance practices, including board composition, remuneration, and related-party transactions. The recent SEBI developments in improving these are well-meaning, but one will have to wait and watch if SEBI can act on any lapses. Further, SEBI can take steps to protect minority shareholders' rights, such as increasing the threshold for approval of special resolutions and providing them with greater representation on the board. SEBI can strengthen its enforcement mechanisms to ensure that companies comply with its regulations and protect shareholders' interests. This includes imposing penalties for non-compliance and taking strict action against fraudulent activities. This would need increased usage of digital tools to real-time scan markets, social media, market intelligence. They need to include scanning the media sector for any undue influence or interference they can have in stock markets.

Scrutiny of board meeting minutes: Currently the listing agreements of listed entities with stock exchanges only effect a perfunctory disclosure of outcomes of board meetings. This does not capture the quality of board discussions, intent and participation of all the board directors attending, any differences or disagreements, etc. It would be useful for the regulators to bring in a rule for video capturing of board discussions which could be available for regulatory supervision on a confidential basis. Unless the quality of board composition and discussions improve, it won’t change the way enterprises are governed.

A regulatory task of consumer protection often has only downside risks. Any positive development is often thankless, and regulators don’t get praised for their efforts. But even a small nuance missed or a fault of any other stakeholder messing up the stability creates negativity about the regulator. Painful? Yes. Not fair? Surely. But then that’s what’s regulators are built of – tough to last, resilient and robust.

Dr Srinath Sridharan is a corporate adviser and author of Time for Bharat. He tweets @ssmumbai