Corporate Governance
Leading Indian Companies

As Indian firms play an increasingly important role in the global economy and corporate leaders face intense scrutiny worldwide, the governance of Indian firms is being transformed. Among many changes, at the end of December, the Securities and Exchange Board of India (SEBI) will implement Clause 49, requiring half of all board members to be independent.

In January 2006, Wharton will launch its first open-enrollment program on governance in India, Governing the Corporation: Global Perspectives in the Indian Context. The program builds on Wharton's successful US programs on corporate governance over the past decade. We recently spoke with Wharton Professor Jitendra Singh, academic director of the new program, about his perspectives on governance in India, drawing upon his research as well as his experience as a board member and advisor to diverse Indian firms.

Q: When and how did you get involved with governance of Indian firms? What have you learned from these experiences?

Starting in the early 1990's, I was very involved in building an India-related agenda at Wharton. In early 2000, near the very peak of the tech boom, I was contacted by a long-time business acquaintance, then an investment banker at Deutsche Bank in London, to advise him on a venture capital fund he was about to set up. This VC fund would focus on investing in startup firms in India, especially in sectors such as software services and business process outsourcing. Eurindia, the London, UK-based firm, has made some quite promising investments. One of these investments, a Chennai, India-based BPO firm, Allsec Technologies, went public in Mumbai earlier this year and is the first noncaptive BPO firm to go public in India. Several other Eurindia investments are still private companies, with the promise of future success for some of them.

While my advisory role with Eurindia gave me a catbird's seat onto the world of Indian technology startups, I was separately invited by Narayana Murthy in the fall of 2000 to join the board of Infosys Technologies, an established software services firm in Bangalore, India. (I had gotten to know him through an earlier case study I had done on his firm.) This was a quite different experience from the world of startups but afforded its own learning and insights. At 16 directors, Infosys had a relatively large board for a firm of its revenue size. What this experience exposed me to was the whole rapidly growing Indian IT sector, well before the story exploded on to the global stage. I also gained insights into the opportunities and challenges at the board level in a firm where several of the original founders are still actively involved as executive directors. It is a firm that is performing excellently by all financial indicators, but also has to consider carefully its globalization trajectory and the role that independent directors must play in charting its future as a global corporation. I gleaned specific insights about the critical role of independent directors and the related challenges. I stayed on the Infosys board until 2003, when I retired from the board to focus more on the pharmaceuticals industry.

In the summer of 2003, I joined the board of a private pharmaceuticals firm, Emcure Pharmaceuticals, based in Pune, India. Emcure is a rapidly growing pharma company that is providing outsourced manufacturing solutions to global pharmaceuticals players. I joined this board because I believe the Indian outsourcing wave that started some years back in software services and IT has just as great, if not greater potential, in the world of biopharmaceuticals. This has been a great learning experience for me, as I have been exposed to the challenges of a mid-tier firm in a different industry which aspires to become a significant player on the global stage. The challenge of shifting the footprint of Emcure from an India-focused firm to a global firm is an exciting one. I am glad to play my director's role in guiding the management team as they execute their plans.

Q: How has the governance of Indian firms changed during your time working with Infosys and other companies?

The governance changes among Indian firms have to be seen in the broader context of changes taking place among leading Indian corporations. While the overall picture is complex and multifaceted, in several specific industries — such as software and IT-enabled services, pharmaceuticals, and automobiles — firms are facing increasing global exposure. A significant proportion of revenues and profits are being generated outside India, and we have seen an increase in both foreign direct investment and portfolio investments in specific sectors and firms. These changes, together with regulatory efforts by SEBI, are altering the governance landscape in India.

In the past, most leading Indian firms belonged to family groups and faced a very different governance environment. Institutional investors typically took board positions but remained relatively passive. By December 31st of this year, every publicly listed Indian corporation is required by SEBI to have 50 percent independent directors. This has resulted in somewhat of a boom period for independent directors, with new stories hitting the headlines in the business press every other day. Of course, what remains to be seen is exactly how this will all shake out in the next few years. The direction, however, is clear. There will be stronger demands for transparency and accountability of managements, especially of companies that are attracting significant foreign investment.

Q: How would you contrast the governance of Indian firms with governance in the US, Europe (particularly the UK)?

It is interesting to ask whether Indian firms will eventually come to look more like US or UK firms. While there have been some dreadful failures in corporate governance in the US in recent years (the list is long: Enron, Tyco, WorldCom, Adelphia, etc.), there are also companies such as GE, which have a reputation for being well-governed. Equally, there are fine European examples such as Unilever or Royal Dutch/Shell, just to name a few. Historically, Indian firms have looked to the UK as a model for governance practices. However, the US influence has become stronger in recent years and is likely to continue.

But it would be a mistake to think that Indian boards will in the near future come to resemble the best US boards in their practices and structure. What is much more likely is that a kind of hybrid model will emerge, with some of the best features of both US and UK boards. For example, while it is common on some of the top US boards for there to be only a few executives represented on the board (the CFO, President, or CEO and Chairman) with the majority of directors being independent, it is clear from the regulatory changes initiated by SEBI that Indian boards will only go after 50 percent independent directors in the foreseeable future.

Q: How is governance in India different from China?

The challenges will be just as great, if not greater, for Chinese firms. However, there are some differences as well. The economic upsurge of China has largely been FDI led, with many more multinational corporations locating their subsidiaries, typically in the manufacturing sector, in China. Clearly, the governance challenges for these firms are different. Also, the transparency, depth, liquidity, and attractiveness of Indian financial markets is probably greater than for China. It is likely that Indian firms will make more rapid strides toward better governance than Chinese firms in the short run, though Chinese firms will inevitably also end up there in time.

Q: With as much detail as you are allowed, what are some of the governance challenges that you've faced in your work with Indian companies? How are these challenges different or similar to those of companies in the West?

While I could raise many governance challenges for Indian firms, I will focus on just one: clarifying and strengthening the role of independent directors. A good starting point is to ask: Whose interests does an independent director represent? Imagine a family-owned firm, which has a majority of the equity held by the public at large, with a minority stake held by the founders or the family members. As long as the founders or family members are represented on the board, their interests are already being taken care of. The independent directors are there to represent the interests of the shareholders at large.

While many may agree with this view in principle, in actual practice it is quite difficult to do justice to the independent director's role. In the boardroom, unless the board chairman models leadership behavior suggesting that dissent is not only tolerated but invited, the pressures for conformity can be quite strong, particularly when the board culture emphasizes cohesion. After all, the very executive directors whose efforts independent directors are supposed to monitor are among those who were instrumental in inviting the independent director onto the board. While the independence of the independent directors is crucial to effective board functioning, it is, in practice, quite difficult to ensure. This is especially true when a large proportion of an independent director's overall compensation comes from membership of a specific board. In this context, the recent SEBI focus on board compensation being no more than 10 percent of an independent director's annual compensation is a welcome move in the right direction. Paying an independent director too much can effectively silence his independent voice and is ultimately unwise. Of course, implementing this idea will likely raise some new complexities.

In broad terms, the challenges are similar in the US. However, it is easier, in principle, to foster the right culture for effective functioning of independent directors when there are only a few executive directors on the board than when half or more board members are executive directors.

Q: What impact have changes such as Sarbanes-Oxley in the US and Derek Higgs in the UK had on Indian companies?

While some of the firms that were already listed in New York (ADR's for firms like Wipro and Infosys, for instance) prior to Sarbanes-Oxley (SOX) are paying serious attention to the specific demands of SOX (even though they are not strictly required to do so), there are some other interesting repercussions. One is that fewer Indian firms are seriously contemplating US listing due to their perception that the demands posed by Sarbanes-Oxley may prove particularly onerous for medium-sized firms when weighed against the advantages of a US listing.

It is noteworthy that while the US response to governance failures has been legislation such as Sarbanes-Oxley, other countries such as the UK, Canada, and Australia have gone for 'softer' solutions. Inevitably, the governance practices of Indian firms will change in the years ahead as the Indian economy globalizes and regulatory changes are promulgated, but the specific trajectory that will unfold is likely to be a hybrid that adopts elements from different governance models while adapting them to local Indian conditions.

Q: How was the Wharton program on “Governing the Corporation" created? Why is it particularly relevant to the challenges facing companies in India at this time?

Jon Spector, Vice Dean of Executive Education, has taken the well-advised view that providing executive programs in both India and China will be a strategic priority for Wharton. One of the first open-enrollment programs is on corporate governance. I think it is particularly timely because this is an idea of critical importance to contemporary Indian business. While the topic is hardly new or unknown to Indian firms, the recent regulatory changes by SEBI are making it necessary for public firms to take a hard look at their governance structures and practices. This is one way in which Wharton can contribute to the ongoing, exciting story of India's economic development.

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