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Good standards of corporate governance boost the growth prospects of ambitious private companies and reduce the risk of corporate failure
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Tata and Infosys have long been icons of good corporate governance in India. Yet in the past year, both have faced issues of appointment of executive leadership, the setting of strategic direction and holding management accountable. In some respects, the turmoil at Tata and Infosys illustrates effective governance in action, as shareholders have demanded and secured change at the top.
The drama of shareholder action to replace management has bounced questions of corporate governance onto the front page. Apparently a dry subject only of interest to specialists — corporate governance matters enormously — for not only does corporate governance mitigate the risk of another Satyam-like corporate implosion, but and more importantly, it is correlated to strong performance over the long term.
The recent Kotak Committee report represents another step towards international standards of good corporate governance. Naturally, most attention has been on the governance of listed companies. However, the Companies Act 2013 also imposed some additional requirements on larger unlisted public companies, requiring appointment of at least one female and two independent directors.
Private companies have rightly, faced less regulatory pressure on their governance. Such companies do not raise capital from public sources and it is for their shareholders to ensure strong compliance and managerial performance. Increasingly, however, many of India’s leading corporates are private, so their governance matters more than in the past. If listed, at least four of India’s current ten unicorns (private companies worth more than $1 billion) would be among the top 100 companies by market capitalisation.
Good standards of corporate governance boost the growth prospects of ambitious private companies and reduce the risk of corporate failure. Strong boards can guide and support founders, as well as constrain them. Non-executive directors from relevant and diverse backgrounds add value to the business. Effective boards provide comfort to investors that equity is being prudently used. Horror stories like the mud-slinging at Housing.com can be avoided.
Evidence suggests that the boards of many private growth companies in India are currently poorly constructed and underperforming. Vinod Khosla remarked, “I bet 70-80 per cent (of venture board members) add negative value to a startup”.
Many founders question the value-add of their boards and often come to see them as an irritating necessity, not a source of constructive advice and help. Many investors struggle to monitor, support and, if necessary, question, the activities of promoters.
I attempted to assess the board composition of India’s current ten unicorns, using data both from public sources and the companies. For the eight companies for which I sourced credible information, the average board size is seven, half of the directors are VC nominees, less than a quarter of the directors are independent and only four companies have a female director. While some of the unicorns demonstrate strong boards, on average these boards fall short of best practice in board composition and diversity.
It would be in the interest of both founders and investors to enhance both board composition and effectiveness. A board made up of founders and investors only is unlikely to be optimal. Board members with relevant sectoral experience are critical and diversity in the boardroom matters greatly in deepening and widening the discussion.
Without adding to the regulatory burden on companies or eroding flexibility, it is time ambitious VC-backed companies upgraded their governance to underpin growth and mitigate risk.
Disclaimer: The views expressed in the article above are those of the authors' and do not necessarily represent or reflect the views of this publishing house. Unless otherwise noted, the author is writing in his/her personal capacity. They are not intended and should not be thought to represent official ideas, attitudes, or policies of any agency or institution.