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Corporate Governance Scorecard

CORPORATE GOVERNANCE SCORECARD FOR INDIA A BSE – IFC INITIATIVE

Background

Listed companies in India are required to comply with the Corporate Governance requirements as specified in the Companies Act, 2013 and SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015.

While most of the companies are compliant with the Law and the Regulations to a significant extent, some companies have taken extra efforts to go beyond what is required in the statute and have been more than compliant on the Corporate Governance Requirements.

However, there is no comprehensive tool for measuring the Corporate Governance status of the companies. Due to lack of a comprehensive tool, companies are not in a position to self-assess their Corporate Governance status and benchmark themselves against other companies nor do the investors have an easy-to-understand measure that provides the Corporate Governance status of a company.

In order to address these issues and as an initiative for the public good, BSE has collaborated with the International Finance Corporation (IFC) Washington, a member of the World Bank Group for developing a "CG Scorecard" for Indian corporates. The CG Scorecard will help companies to benchmark themselves on their Corporate Governance status as well as provide investors a standardized measure of the Corporate Governance status of any company. For this purpose, it was decided to avail the expertise of Institutional Investors Advisory Services (IiAS), a leading proxy advisory firm in India to devise a questionnaire under the guidance of IFC and BSE. The CG Scorecard will help companies to benchmark themselves on their Corporate Governance status as well as provide investors a standardized measure of the Corporate Governance status of any company. For this purpose, it was decided to avail the expertise of Institutional Investors Advisory Services (IiAS), a leading proxy advisory firm in India to devise a questionnaire under the guidance of IFC and BSE.

The CG Scorecard is developed on the basis of four OECD principles for Corporate Governance namely:
  • Enforcing rights and Equitable treatment of shareholders
  • Role of Stakeholders
  • Disclosures and Transparency
  • Responsibilities of the Board

The CG Scorecard has been developed as a set of questions based on the above principles which will test the Corporate Governance status of the company on various parameters.

Companies can use the CG Scorecard to self-assess themselves and identify the parameters where they are lacking and take corrective actions to rectify the same. The companies can also reach out to the Investors by making their scores public after the same has been duly verified by the empaneled Verifying Agencies. Investors (both institutional and retail) can then use these CG Scorecard Ratings as an important factor to supplement their investment decisions.

On February 4, 2016, BSE and IFC had organized an event to announce their collaboration for development of the CG Scorecard for India. Since then IFC, BSE and IiAS have been working on creating a questionnaire for the CG Scorecard that would help companies determine their CG Scores.

In a Public Consultation Workshop held on June 6, 2016, companies, investors and market participants were given an overview of the structure of the CG Scorecard and feedback was sought from the participants. Based on the inputs received from the participants and CG experts, a final document detailing the CG Scorecard has been prepared.

Evaluation method
The quality of Corporate Governance practices referred to in each question shall be recognised on three levels, viz.:
  • 2 points: If the company follows global best practices for that element of Corporate Governance
  • 1 point: If the company follows reasonable practices or meets the Indian standard for that element of Corporate Governance
  • 0 point: If the company needs to improve in that element of Corporate Governance

Objectives of the CG Scorecard
  • Enable a company to assess the quality of its Corporate Governance and their progress over time in corporate governance practices and help them identify with the best followed corporate governance practices across the globe
  • Provide a standardised and systematic way to analyse Corporate Governance across companies, sectors and industries
  • Assist regulatory groups to identify strengths and weaknesses in Corporate Governance practices, leading to further reforms
  • If made public, to provide information to investors of the quality of the Corporate Governance of entities
  • Set a base line for companies to understand their Corporate Governance levels

Weighting of areas / categories
The marks achieved under each principle or category are given certain weightages as mentioned below:

Principle (category) Category weight (%)
Rights & Equitable Treatment of shareholders 30
Role of stakeholders 10
Disclosure & Transparency 30
Responsibilities of Board 30
Total 100


Calculating the CG Score (an example for understanding purposes only)

Principle Questions Maximum Possible Marks
Rights & Equitable treatment of Shareholders 19 38
Role of Stakeholders 9 18
Disclosures & Transparency 23 46
Responsibilities of Board 19 38


Formula for calculating the Score for a Principle
(R/M)*W - where
R = Marks received based on Response to the questions under the Principle
M = Maximum Possible score for the questions under the Principle
W = Weightage assigned to the Principle


Principle R M W Principle Score
Rights & Equitable treatment of Shareholders 26 38 30 21.53
Role of Stakeholders 11 18 10 6.11
Disclosures & Transparency 34 46 30 22.17
Responsibilities of Board 27 38 30 21.32
CG SCORE 70.30


Final CG Score (rounded off to the nearest integer) = 70

The detailed methodology and the questionnaire is now available for review and comments. If you intend to participate in the CG Scorecard initiative, please do contact us at BSE.CGScorecard@bseindia.com to enable us to assist you.

Thank you very much.