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India Inc last in McKinsey report on transparency

Debjoy Sengupta in Kolkata

India Inc has been placed at the bottom of a list of emerging economies in terms of transparency, in a study by McKinsey.

A survey of 188 companies from the emerging markets of India, Malaysia, Mexico, South Korea, Taiwan and Turkey gave India 58 points out of 100, while Malaysia topped the list with 81 points. The criteria of transparency in each of these companies were disclosure and auditing.

The report also revealed in emerging markets, companies which adopted strict corporate-governance practices were rewarded by institutional investors.

The report stated: "By moving from worst to best in corporate governance, companies in our sample could expect, on average, to experience roughly a 10 to 12 per cent increase in their market valuation, a result underscoring the importance investors attach to these attributes."

The market value of a Mexican food processor, for example, stood at $158 million on December 31, 1999. Onerous anti-takeover rules gave the company the lowest score on one measure of governance. If the company adopts less onerous defences, capital markets can raise its valuation by close to 12 per cent. Thus, improving corporate governance could be a strategy for outperforming competitors in financial markets, the report said.

Average scores on various components of corporate governance varied, suggesting that companies in different countries should focus on different components.

South Korea led the governance-reform efforts. Among other things, South Korea's government required major banks and conglomerates to have a majority of directors from outside, to define broad transparent responsibilities, and to establish committees, ensuring independent oversight of board activities.

It also removed the ceiling on foreign ownership, thus intensifying competition, and lowered the size threshold for any group of shareholders seeking to sue a board they believed had failed to protect their interests.

A South Korean organisation, People's Solidarity for Participatory Democracy, subsequently challenged major companies such as Samsung Electronics and SK Telecom.

Although Mexican companies had generally poor scores on board responsibilities and shareholder rights, they had among the highest average scores on transparency, which included accounting standards, disclosure, and auditing.

Companies in emerging markets often claim the Western corporate-governance standards don't apply to them. The study results, however, show investors the world over are looking for high standards of governance and are willing to pay a premium for shares in companies that meet them.

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