PSUs boards are getting more ‘independent’. Is this a new avatar?

This trend was most prominent among PSUs in construction EPC, industrial and capital goods, and oil and gas. (Photo by Pixabay/Pexels)

Public sector undertakings (PSUs) aren’t usually known for their governance standards. There is a tacit understanding that they are there to serve the needs of the promoter (the government).

But in a recent report by CRISIL, which evaluated 586 companies on their environmental, social and governance (ESG) performance, there was a surprising data point. PSUs have doubled the proportion of independent directors on their boards over FY21.

The report said that the average proportion of independent directors on boards of PSUs was 21 percent in 2020 and it jumped to 41 percent the next year for the same set of companies. The average number across all 586 companies was around 50 percent.

“Shareholder activism, particularly from minority shareholders, could be playing an important role,” said Miren Lodha, director of CRISIL Research.

The trend was most prominent among PSUs in construction EPC, industrial and capital goods, and oil and gas.

“Asset managers encouraged by the stewardship code could also be holding boards more accountable as having a good proportion of truly independent directors is a good proxy for well-run companies,” he added.

In July 2020, a stewardship code issued by the market regulator came into effect. The code laid down rules through which the mutual funds could monitor investee companies’ actions and intervene when needed.

According to Lodha, investors are increasingly taking an active interest in the company boards.

“ESG continues to gain momentum in India. More and more domestic investors are taking an active ownership role in their investee companies, not just in terms of appointment of independent directors but also seeking qualified candidates who can stand up to (challenge) decisions taken by the management.

“Aspects like 100 percent attendance on board and committee meetings, appropriate skill sets are some other demands that domestic investors are actively pursuing,” he said.

Also read: Will the sun rise on PSU banks' return on assets?

Signs of change?

Is the improvement in the composition of boards also a sign that PSUs are changing their stripes? That they are getting serious about corporate governance?

Sadly, no. In the report, while PSUs scored well on the social count, they lagged behind on the average score in governance.

The overall average for governance, of all 586 companies that CRISIL scored, was 66. PSUs scored 61, way below mid-caps (67) and small-caps (66). Large caps beat everyone in E, S and G scores.

“Governance practices are more evolved (across all companies evaluated) but unlisted and PSU companies trail,” said the report.

In fact, PSUs dragged down the score of the lending sector, which had otherwise scored “very high” in governance.

Most development finance institutions (DFIs) did not have an independent director and instead had mostly government-nominated directors. “These directors are technically not considered independent in spirit,” said Lodha.

The report illustrated how better governance standards pay off in profits. It said, “The absolute operating profit of the top 10 companies on the G parameter grew at 23 percent CAGR (compound annual growth rate) between fiscals 2019 and 2021, whereas that of the bottom 10 logged a negative CAGR of 7 percent.”

“These companies also outperformed their own sector averages. The top 10 G scorers outperformed by 900 basis points (bps), with 6 out of 10 companies outperforming their respective industry averages. Conversely, the bottom 10 G scorers underperformed by negative 1,200 bps,” it said.