Corporate governance needs to go well beyond mere compliance

Shareholders now demand more than mere regulatory compliance to monitor the governance of companies they partly own

- HETAL DALAL

There’s a soft hum in corporate India that regulatory standards are the end-all of disclosure requirements.

The hum gets louder occasionally, when proxy advisors recommend voting against a particular corporate resolution or when one gets defeated.

This thinking is misplaced at several levels. Regulations define the purpose for which companies need shareholder approval and by when. They provide the basic framework of dos and don'ts, and generally avoid specificity. For example, the rules require the exercise price of stock options to be between the stock's face value and market value, but leave the final decision to the board. Similarly, the rules do not stop related-party transactions from taking place, but list the disclosures required and specify the process and conditions for seeking the approval of the company’s audit committee and/or shareholders.

The claim that regulations invariably safeguard the interests of small shareholders is also tenuous. In companies with private equity on the cap table, shareholder agreements often embed differential rights favouring a specific set of investors, yet these are often ratified through the process of shareholder approval.