Institutional EYE

Commentary on Corporate Governance Issues

What gets measured can be improved: A Corporate Governance Scorecard for India

January 17, 2017

 

IiAS has worked with IFC Washington and the BSE to develop a Corporate Governance Scorecard for India. A scorecard is aquantitative tool to assess the level or standard of corporate governance in an individual company, usually in the form of a
questionnaire.

 

One of the more famous expressions in the US Supreme Court is of Justice Potter
Stewart who in his characterization of pornography wrote, “I know it when I see
it,” to describe his threshold test for obscenity.

 

One can say something similar about governance. Investors know which is a well
governed company (- they certainly know the badly governed one’s). Probe them
regarding a wider set of companies and most will give an impressionist answer
saying ‘A’ is better governed than ‘B’ which is better governed than ‘C’ but falter
to say ‘C’ is better governed than ‘A.’ Experience shows that identifying
governance ‘levels’ at the extremes may be easy, but ranking a large set is not,
unless you can score each company’s governance.

 

Recently IFC Washington, the BSE Limited, and Institutional Investor Advisory
Services – where I work, have been involved with doing just this: quantifying
governance practices through the development of governance scorecards.

 

Anne Molyneux a board member of ICGN, a network of institutional investors
focused on corporate governance, defines scorecards as a quantitative tool to
assess the level or standard of corporate governance in an individual company,
usually in the form of a questionnaire. Governance scorecards are extensively
used in a few countries including Germany and closer home across six ASEAN
countries.

 

A governance scorecard will have uses for all market participants: Companies use
it to hold a mirror to their corporate governance practices. They can measure
themselves to set a baseline score, which will help them benchmark themselves
on the scale and across peers. But the biggest gain for companies is to keep scoring
themselves periodically. Governance practices do not have an ‘immediate fix’ - it
is a journey, and having a compass in the form of a governance scorecard will help
companies navigate through the myriad requirements of its many stakeholders.

 

As part of their investment decision, equity investors are already scoring
companies on their governance quality – whether implicitly or explicitly. A
scorecard gives them a uniform measure across the portfolios, schemes and
competition. They can look at an individual company or take a portfolio approach
an example being the FTSE4Good Index Series which is designed to measure the
performance of companies demonstrating strong Environmental, Social and
Governance (ESG) practices.

 

Combining ratings with governance scorecards if properly used is a very powerful
tool in the hands of lenders. This addresses the issue not just of the ability to pay,

but willingness as well. And finally, regulators. They use scorecards to complement surveillance and measure market-wide governance levels. In ASEAN countries, these are used to provide a common benchmark across the region. In fact, sector specific scorecards are popular – with Singapore, Netherland, Italy and five others developing governance scorecards for banks following the financial crisis.

 

But, for a scorecard to be used and accepted by market participants, it must be relevant to market conditions and existing governance practices. Keeping this in mind, the scorecard uses the G20/OECD principles of corporate governance as a framework (- detailed in an Institutional EYE http://www.iiasadvisory.com/single-post/2016/02/19/OECD-Principles-Are-there-more-regulatory-changes-ahead) – but has also been suitably modified for Indian corporate practices.

 

Companies are expected to answer an aggregate of 70 questions under the four categories for 140 points, which are then normalized to 100. The questionnaire and scoring is in a self-help format. Example “Does the board have gender diversity?” Companies score nil for no women on the board, one mark for a women director on the board, but can get two for having independent women directors. The idea is to nudge companies to walk that extra mile. Answers need to be backed by public disclosures. It is not enough for a company to say it has a succession policy. Some evidence needs to be present in the public domain.

 

It is early to comment on how robust the questionnaire is. However, looking at the S&P BSE SENSEX companies, they seem to fall along a curve, with 7% a leadership role, 43% classified as good, 33% as fair and the remainder 17% anchoring the list. Detractors could argue that just 7% in the leadership role – that too of S&P BSE SENSEX companies – is a harsh standard. But analysis shows that in individual categories, companies have scored over 80% - it is just that companies don’t score uniformly well across all categories.

 

Peter Drucker can be paraphrased to having said ‘what gets measured can be improved’ and improve governance standards in India we must.

 

For more information on the scorecard : paste the following link on to your browser: http://www.iiasadvisory.com/governance-scorecard

 

A modified version of this Institutional EYE appeared in Business Standard on 13 January 2017. Link or paste the following link on your browser:

http://www.business-standard.com/article/opinion/amit-tandon-what-gets-measured-can-be-improved-117011201458_1.html

 

For a PDF version, click here

 

 

Please reload

Recent Posts
Please reload

Archive
Please reload

Older Posts (till 31 Dec'15)
Please reload