A Look At Recent Corporate Governance Trends

Good corporate governance, backed by transparency, strong board and shareholder control, a tighter regulatory ecosystem and the inclusion of environmental, social and governance considerations into the corporate strategy, forms the bedrock for increasing a company's investor credibility. In this article, we outline a few noteworthy corporate governance trends.

Markets are a volatile place and stock prices tend to fluctuate based on future expectations or market rumours. Scrupulous parties have, based on these market rumours, cashed in because of such fluctuations. The Securities and Exchange Board of India, therefore, introduced and amended the Listing Obligations and Disclosure Requirements Regulations on May 21, 2024, mandating the top 100 listed companies based on market capitalisation and thereafter the top 250 listed companies to verify these market rumours if they cause a material share price movement. An obligation has been cast on listed entity promoters, directors, KMP, and senior management to provide explanations and query responses, thereby, ensuring that a company’s corporate governance is strong enough to prevent such market rumours from causing any market disruptions.

With environmentally conscious consumers and an emphasis on accountability in investment, companies are reaching out to ESG rating providers, like CRISIL, to attract investment in “green” schemes involved in sustainable development projects. Investors, however, need to be cautious of 'greenwashing', with companies being hauled up for false and misleading claims about the environmental impact of their products and activities.

In 2023, the Reserve Bank of India introduced a green financing framework for acceptance of green deposits and SEBI has amended the green debt securities regulatory framework to include blue and yellow bonds for water, marine and solar energy, respectively, while enhancing disclosure requirements. The central consumer protection authority, too, has outlined draft guidelines for curbing ‘greenwashing’. Since a company's ESG impact is driving their business agenda, the trend to curb ‘greenwashing’ will facilitate ease of investment in India without compromising investor protection.

This was introduced by SEBI as a regulatory foray into ESG reporting and disclosures for the top 150 listed companies and is to be extended to the top 1,000 listed entities by FY27. BRSR reporting links a company’s financial results with its’ ESG performance, providing a measure of its business conduct and practices. This trend augers well for corporate India, as it focusses on a company’s sustainable and responsible business conduct, which would automatically cause companies to maintain robust governance structures and practices driving long-term value creation.

As per Harvard Law, in 2023, globally, 982 companies were subject to shareholder activist campaigns, representing a 4% rise from 2022 and the highest level since 2019. With several startups quickly becoming unicorns and holding exorbitantly high valuations, cautious shareholders are driving accountability by voting against director appointments, proposing a cap on top executives’ remuneration, blocking transactions, compelling renegotiation of terms, and questioning the independence of independent directors. Recently, ICICI’s minority shareholders reporting valuation irregularities in the merger between ICICI Securities and ICICI Bank and Byju's shareholders reporting mismanagement, insisting upon financial transparency and change in leadership, reflected a positive trend, shaping the Indian corporate landscape, with vigilant shareholders being a catalyst for better governance.

In March 2024, the National Financial Reporting Authority emphasised ‘transparent financial reporting and audit quality as the pillars of corporate governance’. NFRA also proposed the draft annual transparency report, requiring auditors and audit firms to disclose operational, management, and ownership structures to ensure transparent and superior-quality audits and greater corporate governance. Recently, the Ministry of Corporate Affairs levied penalties on LinkedIn India and Microsoft CEOs for failing to comply with provisions of the Companies Act on account of a lack of significant beneficial ownership disclosure, adversely impacting the company’s brand value and reputation. Hence, companies must focus on regulatory compliance, accountable corporate governance and transparency.

There has been a spurt in volume and depth of regulatory compliance requirements, from establishing a robust governance framework for insurers to RBI and SEBI introducing measures to curb malpractices, promote transparency, and disclose family settlement arrangements impacting the promoter's management and control of the company, to disclosing any regulatory, statutory, or judicial enforcement communication and penalising companies for noncompliance. These trends are expected to continue with a stronger regulatory governance landscape.

In this age of globalisation, companies attracting investment are no longer limited to their domestic markets and investors are coming in from the world over. There is thus a focus on having a robust board and a regulatory environment with a lens on sustainable and responsible business practices and therefore, the importance of good corporate governance within a company cannot be undermined. The recent Zee-Invesco drama and the Byju's saga, leading to an erosion of shareholder value, bear testimony to corporate governance infecting shareholder sentiments. Regulators and shareholders have always had a critical role to play in ensuring proper checks and balances; however, the company’s health lies in ensuring its own management and policies are strong rooted to withstand any storm. We, thus, foresee these trends continuing to signal a stronger approach towards corporate governance and informed decision-making in 2024–25.

Nikhil Jhunjhunwala is partner at Khaitan & Co.

Achint Kaur is counsel at Khaitan & Co.