New Delhi, 21 July

Corporate governance is the hottest issue in business management currently. With several American companies facing collapse and worse in the wake of the whiplash of corporate ethics violation charges, investors, shareholders and companies alike are looking at standards of disclosure in companies before they take strategic investment decisions.

In India, the idea of corporate governance is relatively new. Because quantitative definitions of corporate governance are still in the process of being evolved, minimum adherence to law becomes a substitute for the spirit of the law; philanthropy is confused with socially responsible practices; paternalism tends to be defined as gender equality.

However, with globalisation and increasing pressure on Indian companies to meet international norms, corporate governance is going to be a differentiating feature for foreign investors, and maybe even Indian shareholders, alike in the near future.

Recognising this, India’s premier credit rating agency ICRA, has launched a new product- Corporate Governance Ratings (CGR). In June, ICRA assigned a CGR2 rating to the corporate governance practices of ITC Limited, the first ever rating of its kind to an Indian company. This was on a rating scale of CGR1 to CGR6 where CGR1 denotes the highest rating. The CGR2 rating implies that in ICRA’s current opinion, ITC has adopted and follows such practices, conventions and codes as would provide its financial stakeholders a high level of assurance on the quality of corporate governance.

ICRA’s Executive Director and Chief Rating Officer, Naresh Takkar, explained the rationale for evolving a Corporate Governance Rating. "We decided to offer a CGR for Indian companies because we felt there was a need for it. CGR is not just a checklist of things that companies do to promote corporate governance. It is also an evaluation of the key decisions a company has taken. We evaluate on the basis of procedures, materials and information shared with the Board of Directors, based on the minutes; and we review the distribution of rights and responsibilities among different participants in the organisation- such as Board, the management, shareholders and financial stakeholders, the rules and procedures laid down and followed for taking corporate decisions, etc. The emphasis of ICRA rating is on a corporate’s business practices- the quality of disclosure that addresses the requirements of the regulators; and if they are fair and transparent for its financial stakeholders." A rating is purely voluntary- companies have to approach ICRA for a rating. Takkar said it was a measure of confidence ITC has in its corporate governance practices that it sought a rating- in itself a sign of an advanced level of corporate governance. "There are companies that want a rating but are reluctant to share all their information with us. Although ITC did not get the best rating, it did not hide the fact that it had got a good rating and accepted openly that it recognised there was scope for improvement. That in itself is a serious achievement" he said.

Other companies have approached ICRA for ratings. What did companies feel they could gain from being rated? "There are a number of tangible and intangible gains. The intangible gain is the perception among investors and shareholders of a ‘good’ company if it is seen as following progressive corporate governance policies. If your company declares it is going beyond the annual report and doing corporate governance work, it becomes high profile. But there are tangible benefits as well. All the studies on emerging markets- McKinsey has done one and Credit Lyonnaise has done another- indicate that companies which have good corporate governance practices are favoured by investors. Better disclosure norms and better governance helps in the valuation of companies. It also gives an opportunity to a company to project itself in the external world that it has substance. For instance, most companies are required to comply with the independent director norm. but is the spirit of the law being kept? An independent credit rating agency can tell companies where they stand and point out shortcomings in the system."

Takkar added that corporate governance ratings can become the key to that all-important impact on valuation that can become a differentiator. Access to capital is essential, cost to capital even more so. In fact, cost to capital is going to become, in the coming years, a very important source of competitive positioning. So, not just equity investors but also investors and bankers are going to look at corporate ratings to decide where to put their money.

However, it is important to bear in mind that corporate credit rating should not be confused with the functions of an investigative agency. "We’re not bloodhounds looking for fraud. We respect the fact that companies want to share their corporate governance practices with us and we want to contribute to improving them so that their competitiveness is enhanced. We don’t do strategy audits to check if investment decisions taken by a company were correct or not- because things are so fluid that at a particular time, it might indeed have been the right decision. The way we look at the investment decision from the CGR rating point of view is: was the overall decision in good faith, equitable and fair to all stakeholders."