Accountability in action: Rethinking corporate governance for PSUs

For public sector enterprises to compete with global leaders, bold steps are needed to elevate their corporate governance practices

Arindam Goswami | November 25, 2024


#PSU   #Public Sector   #Corporate Governance   #ESG  
(Illustration: Ashish Asthana)
(Illustration: Ashish Asthana)

Corporate governance has long been recognised as the cornerstone for sustainable economic growth, corporate accountability, and stakeholder trust. For India, which aspires to become a USD 5 trillion economy and Vishwa-Guru (a model nation for the world), strengthening governance is imperative, in government as well as government businesses (PSUs).

Despite a robust regulatory framework shaped by the landmark Kotak committee report in 2017, gaps remain in governance practices, particularly in PSUs. Ideally, the government and PSUs should lead by example, rather than lag behind. However, in India, while the private sector faces penalties for breaching corporate governance standards, PSUs often neglect even the basic requirements set by SEBI or MCA without facing repercussions. Hence, it is crucial for the country to reassess its corporate governance framework to align with its economic aspirations.

India’s corporate governance journey has been shaped by pivotal milestones. The Kumar Mangalam Birla committee in 1999 laid the foundation by emphasising accountability, transparency, and stakeholder equity. This was furthered by the Narayana Murthy committee in 2003, which defined governance as ethical conduct that transcends mere compliance. The Kotak committee’s recommendations in 2017 elevated India’s governance framework to global standards by addressing board independence, diversity, and audit practices.

Yet, in well-structured framework, corporate governance failures persist. High-profile cases such as IL&FS and DHFL have underscored systemic weaknesses, raising questions about the effectiveness of the existing measures. Even PSUs, which are critical to India’s socio-economic fabric, often lag in governance practices, creating concerns about transparency, efficiency, and stakeholder trust. In fact, poor performance of several PSUs ultimately leading to their divestment over the last two decades are all indicative of poor corporate governance combined with lax compliance enforcement by the majority shareholder, i.e., the government.

Even now, PSUs continue to face significant challenges in meeting the minimum regulatory standards of corporate governance. Over the years, several assessments of corporate governance scores have highlighted these shortcomings, including a recent study by the Institutional Investor Advisory Services (IiAS). These assessments indicated that PSUs consistently score lower than private enterprises in critical areas such as board composition, independent oversight, and adherence to governance frameworks. Most PSU boards lack the required number of independent directors, a mandatory woman director, with some not appointing independent directors at all.

A significant deterrent to attracting qualified independent directors is the growing fear of legal liabilities as the current environment often conflates responsibility with culpability, holding board members liable for organisational failures even in the absence of direct involvement in any corporate fraud. This creates hesitancy among professionals to join boards, ultimately undermining governance quality. This lack of compliance persists despite regulations applying uniformly across all entities, including PSUs. Moreover, exceptions carved out for PSUs in other regulatory requirements further exacerbate the disparity in governance standards. These practices undermine investor confidence and create an uneven playing field between PSUs and private corporations. To address this, PSUs must align their governance standards with those of private companies. Without significant intervention, their subpar performance risks hindering India’s broader economic aspirations.

For PSUs to compete with global leaders, India must take bold steps to elevate their corporate governance practices. To achieve this, first, policymakers need to create a level playing field between PSUs and private corporations by enforcing similar governance standards. To strengthen corporate governance standards, listed and unlisted PSUs must adopt the SEBI-prescribed Business Responsibility and Sustainability Reporting (BRSR) framework, currently mandated for the top-listed entities, and fully integrate Environmental, Social, and Governance (ESG) principles into their operations. Embracing such global best practices would not only enhance transparency and accountability but also position PSUs as leaders in responsible business practices.

Second, to attract talented human capital in corporate boards, policymakers must establish clearer distinctions between responsibility and culpability. Issuing circulars that explicitly clarify board members will not face legal action without concrete evidence of their involvement in fraudulent activities would foster confidence and encourage skilled professionals to take up these critical roles.

Third, an independent nomination committee free of political influence should be constituted for recommending qualified and talented candidates for the role of independent directors on boards of PSUs.

Fourth, the role of auditors in maintaining corporate transparency is another area that demands immediate attention. Empanelling auditors through regulators, quasi regulators or SROs and assigning them independently could significantly reduce conflicts of interest and enhance trust in audit processes. Additionally, a streamlined auditing procedure with clear guidelines accessible to both regulators and businesses would improve efficiency and credibility. To incentivise adherence to high governance standards, companies demonstrating exemplary governance practices could be rewarded with reduced compliance costs, better ESG ratings, and recognition through industry platforms. Offering tangible benefits for companies that excel in governance would encourage broader adoption of best practices across sectors. These factors could be critical to fostering a culture of transparency among PSUs in India.

Fifth, modern technology can be leveraged for stakeholder feedbacks on PSU governance and empowering minority shareholders to contribute to governance decision. Using blockchain technology to record feedbacks and ensuring traceability of governance reports would ensure higher governance standards and promote inclusivity in corporate decision making in PSUs.

Sixth, peer reviews could play a transformative role in improving corporate governance standards. Ranking companies on governance parameters, based on publicly available data, can introduce a culture of accountability and competition. Sector-wise peer reviews, in particular, could motivate organisations to adopt best practices by creating a transparent mechanism for comparison and improvement. At the same time, the broader governance framework in India must shift its focus from shareholders to stakeholders. The global transition toward stakeholder capitalism, where companies are held accountable to a diverse array of interests, including employees, customers, and society, must find resonance in India. Embedding ESG principles into the corporate governance framework would ensure a more holistic approach to accountability and value creation.

As India charts its path toward becoming a USD 5 trillion economy and the Vishwa-Guru, corporate governance will play a decisive role in ensuring sustainable and equitable growth. A robust, inclusive, and dynamic governance framework, one that holds PSUs and private enterprises to equally high standardscan enhance investor confidence, foster innovation, and drive value creation. By addressing systemic gaps, aligning with global best practices, and incentivising excellence, India has the potential not only to strengthen its corporate governance framework but also to emerge as a global leader in responsible and transparent business practices.

Arindam is Co-founder & Partner at Policy Consensus Centre. Views are personal.

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