The changing dynamics of corporate governance in Indian IT firms
Corporate governance in India is complex – not only because of the rigorous regulations around businesses, but also because of the involvement of and interplay among multiple stakeholders. Corporate governance goes beyond just regulations. It is a delicate task of simultaneously managing the interests of the primary stakeholders of the companies – Founders or Shareholders, Customers, Management team and Employees.
Historically, Indian corporates (including IT companies) have been largely family or promoter owned. Hence, there were little or no distinctions between the management and Founder group. Boards of companies were also largely influenced by the Promoter Group. The average promoter holding in the top 30 IT services companies is 51% compared to 13% in the US. One of the few exceptions to this rule is Infosys.
Hence, it is ironic that it is Infosys wherein the management and board were involved in a confrontation with Narayan Murthy – the company’s iconic founder. As a result of this, the company’s share price declined by 15%, which eroded nearly INR 50,000cr of shareholder wealth, and discussions on corporate governance have resurfaced.
In another example, Cognizant was criticized by Elliott Management Corp, an activist investment firm, for its “growth-at-all-costs” strategy and advised the company to focus on shareholder returns. The company’s share price has since appreciated by more than 30%.
This calls into debate the role of the Board of Directors and how it manages the relationship between various types shareholder – founder, investor and minority – and the company’s management. The Company’s Act of 2013 outlines the responsibilities of Board of Directors and emphasizes of the role of Independent Directors. However, the actual practice of maintaining an “equitable and independent judgement” is complex. In conflict situations, whom does the Board side with? Management? Investors? Founders? What is good for the company?
While more stringent regulations can always be put into place, it is actually the mindset of the Indian corporate industry which needs to change. This will only happen over time, as companies grow larger and become more “professionally” managed – then a more clear distinction will then emerge between the Board, the management and the shareholders.
In the US, shareholder related disputes are quite common. Hence, there are enough precedents for the optimal resolution of such disputes, and legal system has also evolved accordingly. Consequently, the standards of Indian IT industry – with its primary customer being the US – has had a more professional edge over other industries in the country such as manufacturing. However, there is still a lot of room for improvement if India is going to be true global powerhouse in the Technology world.