M. Muneer 
Indian stock markets may be growing but are plagued by many distorting forces including price-rigging, insider trading, opaque financials and overall poor adherence to regulation. Clearly, these are indicators of poor governance and an absence of a proper code of conduct in boards.
A couple of years ago five out of 24 insider trading cases investigsated by SEBI were Adani Group companies and there was also the allegation that one of the SEBI directors investigating was a relative of Adani. Even the darling of stock markets Reliance was found to indulge in insider trading and was fined Rs 25 crore and Ambani was fined Rs 15 crore in recent years.
From Satyam and IL&FS to Kingfisher and Jet and Adani, there have been numerous cases. Crucial to eliminating this is the adherence to ethical behaviour, starting at the board level. The independent directors need to play a truly independent role in holding management accountable.
There are some common issues related to poor board code of conduct in Indian enterprises. First is the dominance of promoters in the boardrooms. In many Indian companies, promoters (founders or controlling shareholders) hold significant influence on the board. This makes it difficult for independent directors to raise concerns or challenge management decisions. Second is the lack of independent oversight. Sometimes, independent directors may not have the necessary expertise or resources to scrutinise complex financial statements or business decisions. Finally, there are conflicts of interest. Board members might have personal or financial ties to the company or its management, creating a conflict of interest that hinders objective decision-making.
Typically, there are three major unethical practices India Inc should be cognizant of, and avoid in developing a code of conduct. One, insider trading, which occurs when directors or someone else on their behalf trade stocks based on privy confidential information. This unethical practice is against the market integrity and torpedoes investor confidence. Insider traders gain an unfair advantage over other investors. Not only does this violate the principle of fairness but also the integrity of stock exchanges. Most regulators have banned this across the world and it is illegal. The low penalties in India are not a deterrent unless combined with jail term.
Ethical and legal standards are a must for board members to avoid the incidents of insider trading. The maintenance of strict confidentiality and restriction on own enterprise stock trading might be necessary. The code of conduct must outline clear policies and procedures that prohibit insider trading, along with educating board members about their obligations.
Two, bribery and corruption, which involve giving, offering, receiving or soliciting money, favours or benefits to influence business decisions or get undue advantages over rivals. Though the Modi government preached clean governance, the electoral bonds saga unfolding currently shows a totally different picture in this respect. How the State Bank of India (SBI) board will react to the chairman’s behaviour against Supreme Court order will be interesting to watch. Unless Indian mindset is totally against this, it is not easy to find a solution other than enforcing stringent laws like in the Nordic countries or the USA.
When board members engage in bribery and corruption, they encourage unfair competition, distort business decisions, and work against the company’s written values. The code of conduct must explicitly promote transparency and ethical behaviour. A robust internal control mechanism should be put in place, and a thorough due diligence on business partners must be undertaken. Offer anti-corruption training if needed.
Also read: BJP Received Almost 90% of All Corporate Donations to Political Parties in 2022-23
Three, not acting in the best interests of shareholders. This is a neglect of the board’s fiduciary responsibilities. This unethical behaviour can lead to decisions that will benefit a select few, or neglect the larger enterprise interests. Such neglect of fiduciary duties can lead to legal action against the board including shareholder lawsuits, regulatory investigations or ED action (not necessarily for Electoral Bonds). In all these cases, financial penalties will be levied, not to mention reputation damage and even removal as board members — all these will result in possible loss of market value as in Adani and Hindenberg report.
A proper board code of conduct serves as a guiding framework to uphold integrity, ethics, and accountability in their roles as stewards of corporate governance. Here are some components of board code of conduct India Inc can adopt:
Ethical standards and integrity: Directors are expected to act with honesty, transparency, and fairness in all their dealings, both within the organisation and with external stakeholders. Avoid conflicts of interest, respect confidentiality, and adhere to legal and regulatory requirements.
Fiduciary duties and responsibilities: Outline these duties, including the duty of care, duty of loyalty, and duty of obedience. Directors are expected to exercise due diligence, prudence, and independent judgement in fulfilling their responsibilities and making decisions that benefit the company as a whole.
Boardroom behaviour and collaboration: Proper boardroom behaviour is essential for a culture of respect, professionalism, and collaboration among directors. Specify expectations for meetings, including punctuality, preparedness, active participation, and constructive dialogue. Directors should demonstrate mutual respect, listen to diverse viewpoints, and work together to achieve common goals.
Confidentiality and information security: Board has access to sensitive and confidential information about the company, its operations, and its strategic plans. Emphasise the importance of maintaining confidentiality and safeguarding proprietary information. Directors should exercise discretion and caution when handling confidential matters and avoid disclosing privileged information without proper authorisation.
Compliance and regulatory requirements: Compliance with laws, regulations, and corporate governance standards is critical. Directors must stay informed about applicable laws and regulations, adhere to corporate policies and procedures, and disclose any potential conflicts of interest.
In the end, a company will be mostly as ethical as its founders are. In the midst of the current EB episode, Biocon chief Kiran Mazumdar Shaw was one of the first to come out and clarify the donations publicly. Salute to such chairpersons!
M. Muneer is a Fortune-500 advisor, startup investor and co-founder of the non-profit Medici Institute for Innovation. He tweets @MuneerMuh.