Explained: Concept of corporate governance scorecard
Corporate governance is a structure of rules, policies, and practices that directs how a company’s board of directors manages and oversees the operations of a company. The main purpose of setting up this structure is to promote accountability by every group that is related to the organization, be it the shareholders, the board of directors, the executive management team, or the company’s employees.
Lack of good corporate governance would lead to the collapse of a company, affecting the shareholders adversely. Owing to this, the Companies Act, 2013 and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015 require all the listed companies in India to comply with the Corporate Governance requirements.
But how do investors differentiate between companies that are compliant with the Law and the Regulations to a significant extent and the ones that have put in extra efforts to go beyond the required minimum compliance? And how would a company assess its own practices against other companies' practices?
To tackle both of these challenges, the Bombay Stock Exchange (BSE), in collaboration with the International Finance Corporation (IFC) came up with "CG Scorecard" for Indian companies. Both the entities availed the services of Institutional Investors Advisory Services (IiAS), a leading proxy advisory firm in India to devise a questionnaire.
The quality of Corporate Governance practices referred to in each question determines the points that the company will receive. The points are awarded as follows-
- For following global best practices for that element of Corporate Governance, two points are awarded.
- For following reasonable practices or meets the Indian standard for that element of Corporate Governance, one point is awarded.
- If improvement is required in a particular element of Corporate Governance, no point is awarded.
The development of this scorecard was done based on four Organization for Economic Cooperation and Development (OECD) principles, which are:
a. Enforcing rights and Equitable treatment of shareholders
b. Role of Stakeholders
c. Disclosures and Transparency
d. Responsibilities of the Board
With this scorecard, companies can gauge their governance practices and help them in their endeavour to follow the best global practices. It also enables investors to assess the corporate governance status of the companies to make better-informed investment decisions. Moreover, it helps regulatory groups in identifying strengths and weaknesses in corporate governance practices, helping to make further reforms.