What’s in a mission statement?

In a wide-ranging FT Lunch article, I saw some interesting remarks from the new McDonald’s boss, Mr. Kempczinski. On the issue of McDonalds becoming the target of US labour organisers campaigning for a $15 minimum hourly wage, Mr Kempczinski is quoted to have said: “it’s not McDonald’s job to set societal policies around things like what’s the right wage rate and stuff like that”. In response, the author, Mr. Edgecliffe-Johnson, is right to wonder how that comment squared with McDonald’s mission articulated a year ago: “to make this company an example for the world”.

This is another example of companies’ mission statements not amounting to much.

Danone and Friedman’s statue

Danone had made news in June for getting onto the “business with purpose” bandwagon. Danone became an enterprise à mission, or purpose driven company which requires it to generate profit for its shareholders, and do so in a way that it says will benefit its customers’ health and the planet. Danone’s CEO Emmanuel Faber even spoke of toppling Friedman’s statue. The Financial Times has reported yesterday that Danone has taken a bigger hit from the pandemic than its competitors and is looking to prune its business. The news article went on to say that investors have been skeptical of the focus on ESG, and “frustrated by Danone’s inability to deliver on its financial targets”. It is the latter part of this statement that I want to highlight. Investors will likely not object to ESG so long as financial targets are being met. In other words, profits matter (especially in times of crisis) and Friedman’s statue is not so easily toppled.

Two sides to the “social licence to operate” idea

The 4th edition of the Australian Securities Exchange Corporate Governance Principles and Recommendations (‘ASX Corporate Governance Draft Revisions’) has an interesting piece of history. The draft version made reference to a company’s culture and ‘social licence to operate’. The relevant principle stipulated that listed companies “should instil and continually reinforce a culture across the organisation of acting lawfully, ethically and in a socially responsible manner”. The commentary to the principle said that a listed company’s “social licence to operate” was “one of its most valuable assets” and that such “licence can be lost or seriously damaged if the entity or its officers or employees are perceived to have acted unlawfully, unethically or in a socially irresponsible manner”. However, per comments received during the consultation period, the words “social license” was omitted from the final version of the 4th edition of the ASX Corporate Governance Principles.

Despite this, companies understand that the community in which they operate is an important stakeholder at a time when social media amplifies community voices directly or indirectly. Rio Tinto, after blowing up a 46,000-year-old sacred Aboriginal shelter in Western Australia knew enough to apologise to the indigenous peoples affected “for the distress the event caused”. Further, when its CEO was faced with calls to resign because he had not read the archaeological report (commissioned by the company in 2018) which pointed out that the site was of the “highest archaeological significance in Australia”, the company’s board decided to address the matter differently. The company board, after a review, announced that the CEO and some other executives who were involved would lose a chunk of their bonus payments. While clawbacks from executive compensation for misconduct and other decisions that harmed various stakeholders (and hence the company and its shareholders) are a good idea, Rio Tinto clearly used it as a way to signal that they care about the community and in fact were attempting to renew their “social licence”.

When we accept this bonus clawback as a positive outcome, it is important to recognise that the converse situation where a company attempts to generate community support to oppose a law is the other side of the same coin. I blogged recently about Google writing an open letter to the Australian public in response to Australia’s proposed News Media Bargaining Code under which tech giants like Google and Facebook would be required to pay for news content failing which they could be faced with penalties worth millions of dollars. The open letter warned that warned that Google would be forced to provide Australians with a “dramatically worse Google Search and YouTube” because of the proposed law. A little later the MD for Facebook Australia and New Zealand followed suit by writing that they “will reluctantly stop allowing publishers and people in Australia from sharing local and international news on Facebook and Instagram”. Facebook’s update further adds:

The ACCC presumes that Facebook benefits most in its relationship with publishers, when in fact the reverse is true. News represents a fraction of what people see in their News Feed and is not a significant source of revenue for us. Still, we recognize that news provides a vitally important role in society and democracy, which is why we offer free tools and training to help media companies reach an audience many times larger than they have previously. 

Facebook products and services in Australia that allow family and friends to connect will not be impacted by this decision. Our global commitment to quality news around the world will not change either. And we will continue to work with governments and regulators who rightly hold our feet to the fire. But successful regulation, like the best journalism, will be grounded in and built on facts. In this instance, it is not.

This, just like Google’s letter, is a direct appeal to the public or the relevant community (in this case, the entire Australian public). The tech giants in this case are also using the “social licence” but in this case it is to their advantage.

Guest post: Board diversity (in India) and Covid-19

Urja Dhapre (III Year, B.Com. LL.B. (Hons.),Institute of Law Nirma University, Ahmedabad)

In recent years, diversity in the board of directors has been a pivotal avenue of research for companies as a valuable instrument of enhancing corporate governance and social responsibility. With the directors holding multiple positions as a trustee, agent or manager, it becomes imperative for a company to have the optimal blend of expertise, skills, and experience on its board.

In today’s scenario, the companies across the globe are confronting the daunting degree of disruption created by the COVID-19 pandemic, and are pressing on their most basic needs- such as adjusting to new working conditions; consolidating the capacity of workforce; maintaining productivity; and a sense of belonging with the mental and physical health of their employees. The aspect of boardroom diversity, in such circumstances, is receding as a strategic priority for companies.

This post argues that innovation and resilience, the two major qualities of a diverse board, will act as a catalyst for companies to better position themselves when the pandemic subdues. To that end, this article highlights the need for Indian companies to have a diverse board, and emphasizes the scope of such diversity. Further, it also suggests a new array of changes required for a company to equip robust corporate governance practices.

Expanding the perspective of diversity

In India, the interplay of diversity and board composition has been progressive. The Companies Act, 2013 [‘Act’], mandated that listed companies have at least one-woman director on their board [Section 149(1) proviso 2]. This proviso came in the light of the government encouraging more woman participation at different levels. This was followed by the Securities and Exchange Board of India [‘SEBI’] amending the Listing Obligations and Disclosure Requirements, 2015 [‘LODR Regulations’] mandating the top 1000 listed companies to appoint at least one woman independent director on a company’s board with effect from April 1, 2020 [Regulation 17(1)(a)]. SEBI’s report on corporate governance noted the rationale behind this provision was to improve gender diversity and sequentially to create a positive impact on the decision-making process of the boards. The LODR Regulations further incorporated a governance policy on diversity, leaving it open for the companies to have an internal diversity policy [Regulation 19(4)].

As these regulations in India are driving the dialogue on gender diversity, the Institutional Investor Advisory Services has released a study [‘IiAS Study’] on the composition of women in Indian boards. The study states the Nifty 500 companies have 17 % women directors [777] out of the total number of directors [4,657] as of March 30, 2020. Of the 777 directorships, 71% are independent directors [548]. This portrays a significant increase in the female representation on boards in Nifty 500 companies elevating from 5% in 2012 to 17% in 2020.

Although the broad reaction of corporate India on having to inculcate at least one woman on every board has been substantially positive, a key question which arises here is whether the concept of diversity is only limited to gender?

Market trends have shown that diversity takes various forms and can be broadly classified into two elements: one is social diversity (e.g., gender, ethnicity/race and age diversity) and the other is professional diversity (cognitive diversity). Across the globe, diversity in the boards has been an upward trajectory, gradual but progressive (see here, here and here). Their boards are advancing on the fronts of gender diversity but have not embraced other forms of social or professional diversity to the same extent. In almost all jurisdictions, the concept of diversity has attenuated to gender diversity.

In this regime where the contemporary regulations have revitalized the focus of gender diversity in boardrooms, there still exists an ample room for progress in efficiently recognizing and incorporating all the tangents of diversity.

Corporate governance and Diversity

The layout of corporate governance in a company is established on four strong pillars of Transparency, Accountability, Fairness and Responsibility. The composition of a company’s board is positively co-related to these principles. Contemporary studies have justified that diversity increases development, with the IiAS Study recognizing diversity as a key component to channel the company’s innovation towards growth.

In a report prepared by McKinsey and company, it was observed that the board of directors bears the preponderance of direct influence on operations and on driving business outcomes. Companies with a diverse board are likely to have a higher financial performance because of an in-depth consumer insight and strengthened employee engagement.

The co-relation of diversity and governance can be witnessed by Section 166(2) of the Act which casts a fiduciary duty upon the directors to promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment. This section displays a shift in the Indian corporate governance structure from shareholder primacy model towards a stakeholder centric model. This structure is strengthened with a diverse board by catering to the needs of stakeholders to effectively recognize their interests. The top-level management comprising different demographic backgrounds further helps the stakeholders to better connect with the company because of a sense of belonging.

Diversity enriches the availability of information, variant perspectives, and the greater chance for debates smoothens the quality of business judgment and the results of board deliberations. Dr. Yılmaz Argüden, a leading strategist has rightly commentedif everybody thinks in the same way, what is the need of a board? It may as well be a one-man show. It is the combination of complementary talents and experiences of the members that enables boards to steer the company toward success and long-term stability.’

In a company’s constant quest for growth, an egalitarian culture with a heterogeneous group of individuals at the board will aid the company to achieve the fundamentals of corporate governance.

What causes a problem in India: Lack of will or skill?

One of the major impediments lies in the construction of the Indian boards, which is not as diffused as other countries, but rather adopts the prevalent nomenclature of a family-centric composition. According to the PrimeData report, out of the 1,723 companies listed on the National Stock Exchange, 425 companies have women directors appointed from a promoter group or their own family. Moreover, as per the IiAS Study, there are 16 directorships held by directors under the age of 30, all of whom belong to the promoter group.

A board’s weak composition in India can be further witnessed by the fact that the long-tenured directors have personal or business ties with the Chief Executive Officer. It moreover, suffers from board pathologies such as groupthink or low-effort norms. This negatively impacts the board performance and oversight by deteriorating the independence of board members and the possibility of them expressing their variant views.

Another issue which arises is the requirement of only one-woman director on the board leading the majority to exert more influence on the group. These under-represented women are seen as tokens where the only value they are supposed to bring on-board is the fact that they are women.

Although the existing regulations in place embodies a step in the right direction, a statutory compulsion for companies for a palpable concept like diversity might be counterproductive. A required outcome might not be achieved as companies can pay lip service to the provisions by appointing their related parties on the board (particularly in promoter led companies) thereby diluting its effect. So, are companies adhering to the regulatory push only for the purpose of checking the box as a formalistic requirement?


The critical fix which corporate India needs is for companies to appreciate the merits of diversity and follow the spirit of the regulations. The need for distinct perspectives around the boardroom table has never been more evident. Companies need to respond rapidly to a raft of challenges with escalating customer expectations and advancing technologies as well as more current challenges presented by the pandemic. For companies to be successful tomorrow, a greater level of alignment will be required between the board, employees, consumers and the community. This can be achieved if the members of the board are diverse across various metrics (like skill, age, experience etc) rather than just gender.

AGMs in the time of coronavirus

Back in 1990, Vice Chancellor Browne-Wilkinson had spent some time discussing virtual meetings in Byng v. The London Life Association Ltd. 1988 WL 622813.

The rationale behind the requirement for meetings in the Companies Act is that the members shall be able to attend in person so as to debate and vote on matters affecting the company. Until recently this could only be achieved by everyone being physically present in the same room face to face. Given modern technological advances, the same result can now be achieved without all the members coming face to face: without being physically in the same room they can be electronically in each other’s presence so as to hear and be heard and to see and be seen. The fact that such a meeting could not have been foreseen at the time the first statutory requirements for meetings were laid down, does not require us to hold that such a meeting is not within the meaning of the word “meeting” in the Companies Act [referring to the UK Companies Act 1985]

Since then, company law statutes in most jurisdictions have been amended to allow for virtual participation in shareholder meetings, atleast when company constitutions provide for it. However, Covid-19 has sent shareholder meetings entirely into the virtual world, and companies have had to adapt in a hurry.

Professor Miriam Schwartz-Ziv has conducted a study to examine what specific barriers exist for shareholder participation in virtual shareholder meetings for 88 firms included in the S&P 500. Based on data from two shareholders who actively participated in shareholder meetings of these firms, she found that firms used several tactics to evade addressing shareholder questions. These tactics included incorrect claims of no additional questions, and announcing at some point during the meeting that only questions related to the proposal would be addressed. Her findings are consistent with some anecdotal data coming out of new stories. For example, a shareholder in an Australian company complained that some of his questions were not read out in the AGM.

Schwartz-Ziv also notes that in face to face meetings, people would line up behind the microphone and could not be ignored. Similarly, in face to face meetings, shareholders could raise their voices to object to statements by management which this would not be possible in virtual meetings. I would also add here that stunts (remember Cedric the pig?) by activist shareholders would also need to be migrated to a virtual setting!

As a solution to the barriers identified by her study, Schwartz-Ziv proposes that the company be required to make some public disclosures including recordings/ transcripts of the meeting, the number of questions submitted, the number of shareholders logged in and the basis of question selection. While these proposals are well intentioned, it would simply add to the ever increasing regulatory burden of companies and it would be better to avoid imposing more compliance costs on companies during the pandemic.

Writing about this issue, Professor Deirdre Ahern proposed that the use of the chat function on platforms where the AGs are hosted can transform AGMs because it would replace the existing formal written questions with “rapid fire background commentary among shareholder attendees”. Indeed, such background commentary could substitute for raised voices and management would be less likely to avoid questions that are picked up and echoed by other shareholders. However, the chat function may not substitute stunts at AGMs and perhaps that will not be such a bad thing.

Google addresses one of its stakeholders about Australia’s proposed News Media Bargaining Code

Talking about how the few big technology companies like Google, Facebook, Apple, etc get far bigger profits from media stories than what the journalists get, Shekhar Gupta (renowned Indian journalist) recently said that the news media editors and writers are the blue-collar workers of big tech. But he immediately followed it up saying that a journalist in today’s world is dependent on the big technology companies.

Both points are relevant to the current stand-off in Australia following its proposal to make tech giants like Google and Facebook to pay for news content failing which they could be faced with penalties worth millions of dollars (under the proposed News Media Bargaining Code). Notwithstanding the fact that these companies profit much more than journalists (as Mr. Gupta has pointed out), it is also true that (ad Google has pointed this out) profits from news content forms only a small proportion of the company’s revenues. Although Google initially entered into a new licensing scheme with some Australia publishers, it has now suspended the scheme.

Instead, Google Australia’s managing director signed an open letter posted two days ago saying: We need to let you know about new government regulation that will hurt how Australians use Google Search and YouTube. She further warned that they would be forced to provide Australians with a “dramatically worse Google Search and YouTube” because of the proposed law. Further complying with the proposed law could lead to Australians’ “data being handed over to big news businesses, and would put the free services you use at risk in Australia”.

Another interesting point the letter makes speaks to the ability of individuals and small business to be able to monetise content on YouTube. It says:

It will create an uneven playing field when it comes to who makes money on YouTube. Through the YouTube Partner Programme, we already share revenues with partners who monetise on YouTube, including news publishers—and we are proud to support quality journalism. But through this law, big news businesses can demand large amounts of money above and beyond what they earn on the platform, leaving fewer funds to invest in you, our creators, and the programmes to help you develop your audience in Australia and around the globe.

Thus, as Jamie Smyth writes in an FT article, the letter is seeking to galvanise public opinion in favour of Google when the Australian parliament considers the law. There is of course the possibility that Google will simply withdraw its news service from Australia if the proposed law is introduced and Australians would stand to lose if that happens.

I’d been writing about how corporations respond to negative publicity (which has been amplified in recent times because of social media) and this story is the same idea viewed from the opposite end. A large corporation here is attempting to use the same public opinion in its favour.

There has been rising support in favour of the argument that the general public is an important stakeholder and its interests are to be considered by company management. In a sense Google is doing just this with its open letter.

PSUs in India (and August 15th wishes)

Most Indians are rightly proud of the liberalisation of the market in the 1990s.

However, Public Sector Undertakings (PSUs) in India have lingered on. PSUs in the banking sector have been in the news lately for their piling non-performing assets.

A recent news piece highlights a more fundamental problem of government control in these entities. Oil and Natural Gas Corporation Limited (ONGC) has asked India’s market regulator (SEBI) to exempt it from rules requiring the listed companies to populate 50% of their board with independent directors. Apparently the power to appoint independent directors rests with the government and this has not been delegated to the company board in question. While I don’t think the mere presence of independent directors on the board will guarantee high quality governance, this disinterest in compliance simply reflects a disregard for good governance by the government.

The government has made noises about privatising PSUs barring a few in strategic sectors but not much has happened on that front as of now. To the extent that we retain PSUs, they should be able to function effectively.

Also, happy independence day India! Here’s to steps and leaps in the right direction.

Corporate purpose and long term thinking

Crises force change and we know the current one has forced a move into more digitization in almost all sectors. Talking about the transformation of law firms, a recent FT article made an incidental point about the business form:

“The partnership model at the heart of many global law firms, which pays out the bulk of profits to partners with a stake in the business, may also prove a strain in the crisis.”

It goes on to quote the managing director of a leading firm saying that this practice of yearly payouts to partners was “short-term thinking”, and that a long-term view was needed. This, in the context of law firms, would translate to retraining lawyers in different practice areas that are more relevant in a crisis (restructuring for instance).

It is interesting to see the importance of long-term thinking being underscored irrespective of the business form.  

The corporate purpose debate has taken on the two-dimensional form of shareholder primacy versus stakeholderism. It will be useful to add more nuance to this debate and find ways to prevent short-term thinking irrespective of the context. While we are accustomed to thinking about short-termism as the root cause of companies focusing on immediate gains for shareholders while neglecting the company’s other stakeholders, it is also true that companies could be short-sighted while pushing a more social cause. (I have a short and ongoing series on short-termism in the latter context.)

Financial journalists within the corporate governance framework

In the wake of Wirecard and Luckin Coffee, much has been written about the importance of short sellers, strong board oversight, and external auditors. All these are important aspects within corporate governance but another gatekeeper that we should not forget is the press. The Wirecard story was investigated and broken by the Financial Times and Luckin’s issues were investigated and published by the Wall Street Journal.

Back in 2007, Professor Michel Borden wrote:

“Financial journalists can play several distinct roles in corporate governance. First, in their capacity as investigative watchdog, they can discover and report financial fraud, and instigate a market-based response that, in combination with governmental investigations, will put an end to the fraud. Second, their reporting can uncover wrongful corporate market conduct and thereby alert traditional players in the legal system and set them into action to correct it. In this respect, they are stalking hounds for regulatory enforcement officials and plaintiffs’ attorneys. Regulatory investigators will get the scent of the hunt from journalists then use their subpoena power to further root out misbehavior and bring appropriate judicial or administrative proceedings.”

As the German government contemplates giving BaFin more powers, it will be important to ensure that Bafin is incentivised to be proactive in responding to media and analyst reports.

Zooming into virtual corporate governance

As I’ve often advocated in my work on diversity, corporate boards will benefit from a diverse group with different perspectives. Diversity, however, is not enough. There needs to be an environment where the different perspectives can be expressed openly. The corporate governance literature has discussed geographical diversity as an important type of diversity. Directors coming from other countries not only bring international experience to the board, they are also not likely to belong to the same immediate networks, thus feeling less constrained to disagree with management.

COVID-19 has forced many activities including board and shareholder meetings to go online. Directors may also engage with each other or with members of management individually when required, again virtually. I recently watched a talk by Justice Dhananjay Chandrachud, a sitting judge of the Indian Supreme Court where he revealed that a young lawyer had told him about one aspect of courts going online. Apparently, the young lawyer felt that in face to face hearings, the more experiences lawyer with a larger than life personality gets more attention when he/ she talks. On the contrary, while hearings are online, the person who is speaking take centre-screen and the rest of the participants have to pay attention.

This was an interesting point and one can imagine virtual board meetings adopting procedures that enable each director to have their say before moving to a discussion phase. Ultimately doing something face to face versus online is simply a matter of changing the procedures. As more board work is done online, it is a good time to reflect on some of the benefits this can bring and how to make sure those benefits are not lost.

Many companies already have international directors on their board. As virtual corporate governance becomes the norm, this is an aspect of board diversity that may become acceptable to more and more companies.