Can corporate governance be measured

A leading consultant in the field delves into India's move towards embracing good corporate governance. Good corporate governance is becoming a priority across the world. An OECD report to G20 finance ministers and central bank governors in 2015 begins as follows: “Good corporate governance is not an end in itself. It is a means to create market confidence and business integrity, which in turn is essential for companies that need access to equity capital for long-term investment.” Experts across the world increasingly feel that good corporate governance practices can instill confidence among international investors and boost economic activity. India is home to some of the world's largest companies - as one of the fastest growing economies in the world, there is a growing commitment to improve corporate governance standards. There is of course still a long way to go. And for many, governance remains a distant goal. Developed Markets take Corporate Governance Standards in Earnest To take corporate governance seriously, appropriate benchmarks and measurement approaches need to be adopted consistently. Scorecards have been in use since 2001 and are becoming more popular. A scorecard can gauge adherence to governance standards, provide corporate governance peer reviews and can act as a motivator for companies to improve practices. A study named 'Code Compliance Study 2016' on German companies by Professor Rapp, Strenger and Wolff of the HHL University, Germany, found that that the acceptance rate of Corporate Governance was a healthy 96.1 per cent in the previous calendar year. In 2009, finance ministers from Association of Southeast Asian Nations, a regional organisation comprising 10 Southeast Asian states promoting intergovernmental cooperation, endorsed the ASEAN Capital Market Forum implementation plan. The plan promotes development of an integrated capital market. A scorecard has since then been used across the region to raise governance standards and build confidence in ASEAN markets. The results can be seen below:

Scorecards are used as a basis to introduce special indices on stock exchanges, such as the Novo Mercado in Brazil and the Shanghai Stock Exchange index in China. These are segments for the trading of shares issued by companies that commit themselves voluntarily to adopt corporate governance practices in addition to those that are required by law. In Germany, a country known for sound governance, annual assessments of the DAX and MDAX companies (the two German stock exchanges having listing of top 30 & 50 companies respectively) are undertaken and are used to improve corporate governance. Lessons learned through the successful experiences across other markets with scorecards, helped IFC to begin a similar exercise in India. Recently, IFC assisted the Bombay Stock Exchange in launching India's first Corporate Governance Scorecard. Institutional Investor Advisory Services (IiAS), an Indian advisory firm that provides independent opinion, research and data on corporate governance issues, was the technical partner responsible for drafting the Scorecard questionnaire and methodology. Despite robust governance frameworks, there is no certainty that companies will adopt best practices. A scorecard is often based on publicly available information and cannot predict the extent to which documented practices are followed in every circumstance. There is also a possibility that a company may change its behaviour following a change in internal or external factors. No corporate governance assessment can really reveal the internal commitment of the board and management to improve governance standards. However, there is little doubt that a scorecard proves to be a useful guide for the working of a company. Good Governance is Good Business Investor interest in scorecards is high as investors believe that good governance brings real benefits to companies that is passed on to shareholders. Scorecards not only improve decision-making and risk-management in companies, but ensure proper accountability, giving confidence to creditors. This is amply demonstrated by a 2015 CFA survey of asset managers, conducted by CFA institute, a global association of investment professionals that sets the standard for excellence in the industry. The survey revealed that 73 per cent of investment professionals worldwide take environmental, social, and corporate governance issues into account when making investment decisions. In Canada, for instance, 80 per cent of institutional investors review governance issues during every investment. Credit Suisse uses a proprietary scorecard while taking investment decisions. Growing use of the scorecard by Indian companies to evaluate their corporate governance will help instill confidence among global investors considering investments in India. Conclusion A scorecard and its success depends on its acceptance in the market. The onus is on each of the private sector companies especially those who value it in letter and in spirit. Globally, the positive impact of scorecards in holistic development of markets and enhancing the credibility is a strong reason for furthering its adoption in many of the emerging markets. Anne Molyneux is a Consultant with IFC, a member of the World Bank Group. She is an adviser on corporate governance, financial sector regulation and reform and institutional capacity building. She also represents the International Corporate Governance Network, with membership across 50 countries.