2018 was a year of Corporate Mis-Governance for India Inc. Be it big names like IL&FS, Tata Sons, Infosys, ICICI Bank, Axis Bank, Yes Bank, Fortis or small buds like Vakrangee and Manpasand. All of them felled prey to faulty governance.
On paper India has one of the most stringent regulations, but in reality the picture is opposite.
Corporate Mis-Governance has eroded investor’s wealth drastically over the years, which is visible from the fact that, Yes Bank, one of the major private sector bank is currently down by 53% from its 52 week high!
So, before investing in any scrip, corporate governance has to be the priority on your checklist. Checking independency of the majority of the Board, is just a start. The real scan is much more detailed.
Here we are going to highlight some of the key checks that you must perform before making an investment decision.
1) Always check the term of independent directors. If independent directors are serving on the Board from long time, then they may be only artificially independent.
2) Although independent directors are meant to be watch dogs, they are the first to resign at the time of stress. So, do check if any independent director has resigned recently for any cause other than termination of their term.
3) Are independent directors providing any advisory services to other companies, and do these companies have any business relationship with your entity? If the answer is yes, then it is an avoid.
4) Number of meetings held by different board committees specifically audit, remuneration and risk committees. Inadequate number of meetings is a warning sign.
(Fact: Risk committee of IL&FS did not even meet once a year!)
5) Attendance of independent directors in meetings; less than 50% is alarming.
6) Duration of board meetings can also reflect governance standards. Low duration is often related with poor governance.
7) Chairman represents shareholders whereas CEO represents management. Thus, the role of chairman and CEO should be vested with different persons. This enhances the accountability of the management towards shareholders.
Although the above checklist is not exhaustive, following it will give you a fair idea about the quality of the management. It may take you time to perform these checks, but your hard earned money definitely deserves it.
Do share it with your friends and save them from investing in governance risky companies.