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S. Vaidya Nathan

THE emerging business of corporate governance rating may not add much value for stakeholders in India Inc. In the past couple of months, the credit rating agencies have come up with corporate governance rating for a few companies such as Infosys. Such ratings would only add an extra element of routine to an issue that is largely subjective. The utility of such ratings may be very limited. In general, the market has done a better job of sifting the companies based on quality of governance.

In the process, if some companies with high quality governance enjoy modest price-earnings multiples, it is due to other factors such as trading interest and liquidity in the stock. Few such companies tend to be in the mid-cap category and, traditionally, speculative interest is limited. But compared to their peers, these companies enjoy better valuation levels. Stocks such as Sundram Fasteners and Sundaram Clayton are good examples.

Corporate governance ratings as a concept may not uncover anything that is new. On the other hand, such ratings hold potential to mislead investors who may view the company in favourable light based on them. As a concept, corporate governance ratings run the risks that rating of debt instruments suffer from — perhaps even to a greater extent.

Uninspiring debt experience: The manner in which credit rating of debt instruments has gone spectacularly wrong for companies ranging from CRB Capital Markets to IFCI is a good example. Long before the rating agencies woke up to problems in a myriad range of NBFCs and institutions such as IFCI, the markets had priced in the negatives. In such cases, the poor quality of the initial ratings and the belated recognition of reality are not problems peculiar for debt instruments in the finance sector. Investors in the debt instruments of these companies have every reason to be disappointed with the initial ratings that would have influenced their decisions. Of course, in the last two years, credit rating agencies have been effecting changes to their ratings with greater alacrity. If debt ratings can be a tough terrain, rating corporate governance in a complete manner can only be even more so.

Code compliance: The regulatory framework on corporate governance is evolving with the Securities and Exchange Board of India (SEBI) adding more compliance requirements in areas such audit committees, board composition and compensation meetings, among others. As these requirements were made part of the listing agreement, companies have been dishing out routine fare in the annual reports about the adoption of corporate governance practices as prescribed by SEBI.

Reports on this issue have acquired the same routine hue as audit reports. In most cases, they can be comfortably flipped over without missing much by way of critical information. To have a rating agency measure the compliance would not add much value to this whole exercise. For instance, ICRA says its rating "is meant to indicate the relative level to which an organisation accepts and follows the codes and guidelines of corporate governance practices''.

The values element: In all this routine regulatory emphasis on corporate governance, the big point that is missed is the `values' brought to the table by the owners and/or managers. Companies, irrespective of what the owners/managers bring to the table, can comply with the kind of routine required by SEBI. But, ultimately, the credibility of management and corporate governance is linked more to the values than necessarily the mere existence of audit committees and independent board members. The latter can at best serve as checks and balances.

It would not be easy to factor in the values factor in any rating. One may take the line that the kind of practices followed by a company would reflect the values of the owners and/or managers. In a few cases such as Infosys, Sundram Fasteners, HDFC and TVS Motor, this may indeed be the case. But in most cases, the practices of the kind considered for rating may not reflect the values aspect.

This is a highly subjective area, which cannot be captured in the ambit of ratings, barring obvious cases such as Infosys at the top end. Given this critical aspect, it is just as well that the special SEBI committee on corporate governance headed by Mr N. R. Narayana Murthy, Chief Mentor of Infosys, has recommended that ratings should not be mandatory. SEBI and the rating agencies should, in fact, view the regulatory prescription on these issues as potential checks and balances. It should not be confused with corporate governance. Doing so would be a disservice to investors.

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