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."
