State-owned, poorly governed: PSUs fall short on board composition

PSUs, corporate governance
A report reveals all non-compliant companies in the BSE 100 for board independence were PSUs, raising concerns about their governance structures.

Public Sector Undertakings fare poorly in compliance with corporate governance norms, lagging behind private companies in governance and board structures, says a report by Institutional Investor Advisory Services. An analysis of the BSE 100 companies revealed that 93 complied with regulatory requirements for board independence as of December 2023. However, the seven non-compliant companies were all PSUs, including a bank.

This issue has been rampant among PSUs, where regulations are often less stringent compared with private companies. Some PSUs failed to meet even the minimum regulatory standards due to weak board structures. Despite years of concern, regulatory enforcement remains lax. The IIAS report highlights that the government has exempted PSUs from many corporate governance regulations. Given that the government controls these entities, there’s potential for interference in decision-making and appointments, undermining independent oversight and accountability.

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Unlike private companies, which are driven by market forces and shareholder interests, PSUs do not face any pressures to perform efficiently or adopt best practices. This lack of urgency in addressing board composition and transparency issues contributes to their governance challenges.

While investors have traditionally viewed companies controlled by private promoters as most susceptible to mismanagement and poor governance, Indian PSUs challenge this perception. For example, the government-backed Power Trading Corporation and its subsidiary PTC India Financial Services demonstrate that state backing and dispersed institutional holdings do not guarantee good governance.

PFS faced numerous controversies, from mass resignations of independent directors citing governance failures to SEBI penalties for non-compliance with its Listing and Disclosure Obligation Regulations, and a forensic audit indicating possible loan evergreening. A 2023 Comptroller and Auditor General of India compliance audit also highlighted lax governance across PSUs.

The CAG report identified widespread corporate governance norm violations in 72 listed PSUs, with notable companies like NMDC and Coal India lacking the required number of independent directors, and others including ONGC and SAIL falling short of necessary non-executive directors.

There is potential for significant reform within PSUs to enhance their governance and operational efficiency. This would not only improve their competitiveness but also their contribution to the national economy. Strong governance in PSUs can lead to better resource allocation, increased transparency, and higher accountability, ultimately leading to enhanced public trust and investor confidence. Such reforms should include the implementation of stricter governance frameworks, enhanced oversight mechanisms, and the promotion of a culture of ethical leadership and decision-making at all levels.

Reforming PSUs

The broader economic implications of PSU governance cannot be understated. Effective governance and management of such entities is crucial for economic stability and growth. PSUs play a pivotal role in critical sectors such as energy, banking, and infrastructure, which are essential for the country’s development. Improving governance in these enterprises is not just about enhancing corporate performance; it is about bolstering economic resilience, fostering innovation, and driving sustainable growth. By addressing governance challenges, PSUs can better serve as engines of economic development and social progress.

Moreover, enhancing PSU governance aligns with global best practices and helps attract foreign investment. Investors are increasingly concerned with governance issues, viewing them as indicators of a company’s long-term viability and risk profile. By adopting international governance standards, PSUs can improve their attractiveness as investment destinations, contributing to the broader goal of integrating the Indian economy with global markets.

Corporate governance norms stipulate that listed companies with an executive director or promoter group chairperson must ensure at least half their board consists of independent directors. Other companies must have a minimum of 33% independent directors. Despite the governance issues at PSUs, the Corporate Governance Score report shows significant improvement across the BSE100 index constituents, with 64 companies reaching the ‘Good’ or ‘Leadership’ category.

This progress suggests an upward trend in corporate governance, contrasting with the poor adherence to governance rules among listed central PSUs. This sets a negative precedent for the private sector, reinforcing the view that PSU stocks are not reliable wealth generators. For PSUs to realise their full potential, the government must prioritise establishing credible, autonomous boards and uphold governance rules, focusing on minority shareholders’ interests.