In a bid to shine a light on corporate governance practices across India's top companies, the Fifth Edition of Excellence Enablers' Survey on Corporate Governance was launched recently.

This comprehensive survey, conducted by Excellence Enablers—a specialist advisory firm in Corporate Governance and ESG—offers a deep dive into the governance practices of the NIFTY 100 companies, providing a panoramic view of their compliance, board composition, and adherence to regulatory and ethical standards.

Corporate governance, often considered the cornerstone of a company’s integrity and efficiency, continues to evolve as regulations tighten and stakeholder expectations rise. The Survey sheds light on critical trends, challenges, and opportunities in this space, particularly focusing on risk management, committee operations, and shareholder engagement.

M. Damodaran

Governance Beyond Compliance

The survey underscores the critical distinction between compliance and true corporate governance. While compliance is a non-negotiable baseline dictated by laws and regulations, governance is defined by doing the right things for the right reasons, often setting benchmarks that inspire regulatory reforms.

Despite companies emphasizing their adherence to regulations, the survey notes that governance excellence lies beyond a mere checklist. By examining public domain data, including annual reports and stock exchange disclosures, the survey aims to spotlight both best practices and areas needing improvement.

Key Findings

Driving Change

Excellence Enablers stresses that the survey is not a fault-finding exercise but a reflective tool. It seeks to inspire companies to evaluate their governance frameworks and draw lessons from industry leaders who have successfully aligned their practices with stakeholder interests.

A Call to Action

As governance standards evolve, this survey provides valuable insights for corporations, regulators, and academia. It aims to encourage organizations to strive for excellence, reminding them that while compliance is mandatory, governance excellence is a conscious choice that fosters sustainable value creation.

The Road Ahead

The Fifth Edition of the Excellence Enablers’ Survey serves as a mirror for corporate India, highlighting achievements while revealing opportunities for growth. With its findings, the hope is that more companies will embrace governance not just as a mandate but as a mission to build a robust and sustainable corporate ecosystem.

In an era of heightened corporate governance, a recent survey highlights critical insights into the evolution of board composition, diversity, and effectiveness across leading companies over the past four fiscal years. The findings shed light on emerging trends and persistent gaps, emphasizing the evolving role of boards in navigating complex business landscapes.

Geographical and Age Diversity

With globalization, geographical diversity among directors is gaining importance. While a notable shift in global representation is evident, companies are yet to fully embrace this aspect of inclusivity. In terms of age diversity, the presence of younger independent directors (IDs) remains limited. As of FY 2024, only 19 out of 561 IDs were under 50 years of age, a decline from prior years. The average age of IDs hovered around 63.61 years, underscoring a need for younger perspectives to future-proof board strategies.

Skillsets and Expertise

The survey revealed a growing awareness of the importance of diverse skills on boards. However, only 9 companies in FY 2024 explicitly identified “diversity” as a necessary skill set. Similarly, “soft skills” were recognized by only 8 companies, reflecting untapped opportunities for fostering holistic board competencies.

Tenure Trends

Tenure emerged as a critical factor influencing board effectiveness. While regulatory caps ensure a maximum of two consecutive terms for IDs, the average tenure of non-independent directors (NIDs) has been a topic of discussion. As of FY 2024, the average tenure of directors stood at 6.16 years, while the longest-serving director marked 55.61 years of service.

Board Meetings and Attendance

The survey applauded most companies for exceeding the statutory requirement of four board meetings annually, with some holding as many as 23 in FY 2024. However, diminishing returns from excessively frequent meetings were noted. Attendance trends showed virtual meetings significantly boosting participation, with 74.73% of directors achieving 100% attendance in FY 2024.

Audit and Committee Oversight

Audit Committees (ACs) continue to play a pivotal role, with regulations mandating at least four meetings per year. In FY 2024, the highest number of AC meetings reached 25, underscoring the increased focus on robust financial oversight. The practice of independent directors exclusively constituting ACs has gained traction, with 23 companies adopting this model consistently over four years.

Opportunities for Governance Enhancements

While progress is evident, the survey identifies areas for improvement, including stronger age and geographical diversity, broader skill representation, and optimal tenure policies. The findings advocate for more inclusive and dynamic boards that align with evolving economic and societal needs.

This comprehensive analysis serves as a reminder that while governance structures are improving, there remains a pressing need to balance tradition with transformation in shaping future-ready boards.

Corporate Governance: Trends and Observations from Recent Surveys

Corporate governance practices have evolved significantly over the past few years, as evidenced by recent data on various committees and their functioning. These insights shed light on the Nomination and Remuneration Committee (NRC), Stakeholders Relationship Committee (SRC), Corporate Social Responsibility Committee (CSRC), and Risk Management Committee (RMC).

Nomination and Remuneration Committee (NRC)

Size of NRC

The size of NRCs has varied, with some instances of unusually large committees:

Such large sizes could potentially hinder productivity and effective decision-making.

NRC Composition and Independent Directors (IDs)

Ensuring objectivity and performance-linked remuneration, the presence of only IDs in NRCs is considered ideal. Over the past four years, 17 companies consistently had NRCs with only IDs as members. Including the Chair of the Board as a member (but not the Chair of the NRC) has also been identified as beneficial, with 31 companies maintaining this practice across four years.

Attendance and Meetings

Attendance trends indicate high commitment among members:

While Regulation 19(3A) of SEBI LODR Regulations mandates at least one meeting per year, this appears insufficient. The highest number of meetings was:

Notably, one company failed to meet even the minimum requirement in FY 21, FY 22, and FY 24, convening only one meeting in FY 23.

Stakeholders Relationship Committee (SRC)

Composition and Leadership

The SRC is essential for addressing grievances of security holders. The highest number of SRC members was:

Although the Companies Act mandates the SRC Chair to be a Non-Executive Director (NED), having an ID as Chair would enhance impartiality. In the last four years, 69 companies had an ID as Chair.

Attendance and Meetings

Attendance rates among SRC members:

The highest number of meetings was:

However, 14 companies consistently held only one meeting per year over the past four years, signaling inadequate attention to stakeholders’ concerns.

Handling Complaints

Over the past four years:

Expanding the remit of the SRC to address grievances of stakeholders beyond security holders could better align with its broader role.

Corporate Social Responsibility Committee (CSRC)

Composition and Leadership

The CSRC oversees CSR activities, with the largest membership:

In the last four years, 40 companies consistently had an ID as Chair, though there are no statutory requirements regarding the Chair’s category.

Attendance and Meetings

Attendance trends indicate strong participation:

Meeting frequencies were highest as follows:

Five companies, however, held only one meeting annually over the past four years. Expanding the CSRC’s scope to address Environmental, Social, and Governance (ESG) elements is crucial.

Employee Volunteering

Employee engagement in CSR activities enhances their impact. Over the past four years, 34 companies encouraged employee volunteering.

Risk Management Committee (RMC)

Composition and Leadership

With growing risks, RMCs must focus on broader issues beyond operational risks. The largest RMCs had:

Including more IDs and Board members would ensure diverse perspectives. Over four years, 48 companies consistently had an ID as Chair.

Synergies with Audit Committee (AC)

Common membership between RMCs and ACs enhances collaboration. However, full overlap should be avoided. Seven companies maintained partial common membership over four years.

Attendance of Risk Management Committee (RMC) Members

Risk management, a crucial pillar for organizational resilience, demands unwavering attention. However, attendance at Risk Management Committee (RMC) meetings shows room for improvement. Over the past four financial years, the percentage of members with 100% attendance fluctuated:

The SEBI LODR Regulations, 2015, mandate a minimum of two meetings annually and stipulate that no more than 180 days should elapse between consecutive meetings. Yet, seven companies persistently convened only the minimum required meetings over the last four years, signaling a need for a more proactive approach to risk oversight.

Number of RMC Meetings

The highest number of RMC meetings held in the last four years paints a stark contrast:

These figures underscore the pressing need to move beyond a “box-ticking” approach. With risks like cyber security, geopolitical tensions, and ESG concerns rising, two meetings annually barely scratch the surface of effective risk management.

Cyber Security Incidents and the Role of the Chief Risk Officer (CRO)

In FY24, five companies reported cyber security breaches, with only one disclosing detailed information—highlighting the reluctance to address such issues transparently. Encouragingly, 40 companies consistently disclosed the presence of a Chief Risk Officer (CRO) across all four years. However, double-hatting by CROs remains suboptimal, as it dilutes the focus needed for robust risk management.

Committee Membership and Governance Dynamics

Committee composition remains a contentious area. Over the last four financial years:

While frequent leadership changes can disrupt continuity, static committee leadership over extended periods stifles innovation and fresh perspectives.

Annual General Meetings (AGMs): Bridging Shareholder Gaps

AGMs serve as a vital platform for shareholder-director interaction. However, trends from the survey reveal concerning practices:

Voting Patterns and Resolutions

Shareholder voting trends highlight a high level of approval for proposed resolutions. However, notable exceptions include:

Despite these few instances of dissent, resolutions for Independent Directors’ appointments consistently received overwhelming support, with only one ID appointment per year receiving less than 80% approval.

Variable Pay for Whole-Time Directors (WTDs)

Executive compensation remains a cornerstone of corporate governance. The survey reveals an encouraging trend in incorporating variable pay for WTDs, linking it to performance through predefined Key Result Areas (KRAs).

This steady increase reflects an industry-wide shift toward transparency and performance-based rewards, encouraging accountability and alignment with company objectives.

Shareholder Satisfaction Surveys

While shareholder satisfaction surveys are conducted by some companies, the survey critiques the current format of these questionnaires. Mechanically structured questions often fail to capture genuine shareholder sentiments. The survey recommends open-ended queries to better understand shareholder priorities and areas for improvement.

Independent Directors: Meetings and Compensation

The role of independent directors continues to expand, necessitating adequate support and compensation.

Executive Stock Options and Disclosure Practices

Transparency around executive compensation remains a mixed bag. Over the past four years:

The Excellence Enablers’ Survey highlights significant progress in adopting governance best practices, especially in executive compensation and ID engagement. However, gaps persist, particularly in equitable compensation distribution, maximizing ID contributions, and robust shareholder engagement.

To address these gaps, the survey recommends:

By adopting these measures, companies can foster a culture of transparency, accountability, and long-term value creation.

Clawback of Salaries: A Rarity?

One of the most debated aspects of corporate governance is the enforcement of clawback provisions for executives, aimed at curbing excessive or unjustified payouts. The survey revealed that only ten companies consistently disclosed clawback mechanisms in their annual reports over four financial years. This underlines a significant gap in corporate accountability, highlighting the need for broader adoption of such practices.

Resignation Transparency: Real Reasons or Generic Excuses?

Regulations like SEBI's LODR mandate detailed disclosures on resignations by independent directors (IDs) and key managerial personnel (KMPs). Despite this, the pervasive use of vague reasons like “personal commitments” undermines the spirit of these rules. Stakeholders require deeper insights into governance disputes or operational dissatisfaction to evaluate a company’s governance health.

Succession Planning: An Evolving Necessity

Disruption caused by sudden leadership exits can be mitigated through robust succession planning. However, the survey found that only 27 companies disclosed detailed succession plans for both board and management over the past four years. Alarmingly, nine companies reported no such disclosures, raising questions about their preparedness for unforeseen changes.

Corporate Social Responsibility: A Work in Progress

While CSR has been legally mandated since 2013, gaps persist in execution and impact assessment. The survey highlighted instances where companies fell short of spending the prescribed 2% of average net profits. One company notably failed to transfer unspent CSR funds to a designated account, violating legal norms. Furthermore, a focus on expenditures without assessing project outcomes often results in superficial compliance rather than meaningful societal impact.

POSH Disclosures: Progress with Gaps

The Prevention of Sexual Harassment (POSH) Act mandates disclosures on complaints filed and their resolution. Over the years, there has been a notable rise in reported cases—from 660 in FY21 to 1,622 in FY24—with resolution rates improving to 89% in FY24. However, the absence of clarity on outcomes and remedial actions raises concerns. Additionally, 23 companies reported zero complaints in FY24, a figure that could indicate either an exemplary workplace or underreporting due to employee apprehension.

Auditing Practices: Independence Under Scrutiny

The survey shed light on varying practices in statutory, internal, and secretarial audits. Joint audits were practiced consistently by 27 companies, aligning with regulatory guidance to ensure diverse oversight. However, the highest ratio of non-audit fees to audit fees reached an alarming 262% in FY24, potentially compromising auditor independence. Similarly, over ten years, 41 companies retained the same secretarial audit firm, risking familiarity that may dilute vigilance.

The Way Forward: Building Transparent and Accountable Governance

The survey underscores a pressing need for Indian corporates to elevate their governance standards. Companies must embrace transparent disclosures, robust compliance mechanisms, and genuine stakeholder engagement. Whether it’s about enforcing clawbacks, disclosing resignation reasons, implementing succession plans, or conducting meaningful CSR initiatives, the focus should shift from ticking regulatory boxes to creating long-term value.

By fostering a culture of accountability and ethical leadership, Indian businesses can not only navigate regulatory landscapes but also secure the trust and confidence of their stakeholders in a rapidly evolving global economy.

The Secretarial Compliance Report: A New Norm

The Secretarial Compliance Report, introduced under the SEBI Circular dated February 8, 2019, requires all listed companies to submit this report to stock exchanges within sixty days of the financial year’s end. This mandatory disclosure aims to assess a company’s compliance with the applicable legal and regulatory framework. The report provides a snapshot of a company's history, the status of its compliance, and pending matters that require management action.

However, not all companies have consistently adhered to these requirements. Over the last four financial years, 17 companies have repeatedly failed to comply with this directive. In contrast, companies that have made an effort to meet compliance standards often use the report as a valuable tool for self-assessment and continuous improvement.

Board Evaluation: A Key Focus

Board evaluations have emerged as a crucial element in corporate governance, assessing the performance of the board, its committees, and individual directors. According to Regulation 17(10) of the SEBI LODR Regulations, 2015, board evaluation includes an assessment of the independent directors' performance and their ability to maintain independence from the management. However, feedback from these evaluations has often been absent, diminishing the effectiveness of the process.

Interestingly, a few progressive companies have started to act on the feedback, preparing action plans and monitoring improvements over the years. This shift towards more meaningful board evaluations could significantly enhance overall governance practices.

Discretionary Practices and Their Adoption

While certain corporate governance practices are mandatory, others are discretionary under SEBI LODR Regulations, 2015. For example, the appointment of a non-executive chairperson and the separation of roles between the Chairperson and CEO are optional but encouraged practices. Despite being discretionary, companies are increasingly adopting these practices, signaling a shift towards more robust governance structures.

However, certain areas like Directors and Officers Liability Insurance (D&O Insurance) and the maintenance of the Chair’s office still show a lack of widespread adoption. 42 companies have followed the D&O insurance policy, while others have yet to implement such practices consistently.

Vigil Mechanism: Ensuring Accountability

The Vigil Mechanism, also known as the Whistleblower Mechanism, is an essential tool for encouraging employees and directors to report grievances anonymously. Section 177(10) of the Companies Act, 2013, mandates the establishment of such mechanisms to protect whistleblowers from retaliation. The survey highlights that a significant number of companies have disclosed their whistleblower policies and provided direct access to the Chairperson of the Audit Committee (AC). However, there is still room for improvement in how these mechanisms are used to resolve complaints and ensure accountability.

Employee Compensation: A Reflective Indicator

One of the most pressing issues in corporate governance is the growing disparity in executive compensation. In the past four financial years, the ratio of median employee compensation to the highest paid director’s compensation has raised concerns about equity. For instance, in FY 24, the highest ratio was 1844:1, which indicates an imbalance that may be perceived negatively by stakeholders. Such disparities highlight the need for better alignment between the compensation of senior management and the wider workforce.

Other Key Findings

In addition to the issues above, the survey explored other governance processes such as the preparation of an Annual Calendar, the use of Board Portals, and the implementation of Employee Satisfaction Surveys. The Annual Calendar ensures that directors can plan and attend meetings well in advance, while Board Portals help in creating a paperless, confidential, and more efficient decision-making environment. However, not all companies have embraced these practices, with many still lagging in these areas.

Another critical area of focus is the Anti-Bribery/Anti-Corruption initiatives, which have become an essential part of corporate governance. Companies are increasingly reporting the number of complaints received, with a significant number still pending resolution. This indicates a need for companies to enhance their mechanisms for addressing corruption-related complaints and ensuring quick resolution.

The Road Ahead: A Call for Continuous Improvement

While many companies have made strides toward improving corporate governance, the survey’s findings indicate that consistent implementation and meaningful action remain areas for improvement. For example, feedback from Board evaluations, better disclosure practices, and an enhanced Whistleblower Mechanism will contribute to a more transparent and accountable corporate environment.

As corporate governance evolves, the hope is that companies will not wait for regulations to turn discretionary practices into mandatory ones. Instead, they should proactively integrate these best practices into their operations to ensure they maintain the trust of investors, regulators, and the broader community.

The journey towards excellence in corporate governance is ongoing, and the Excellence Enablers' Survey provides valuable insights into the areas that require attention, as well as the progress made over the years. For those companies that have already embraced these practices, the next challenge is ensuring that they evolve with the changing expectations of stakeholders.