Recently, the Sebi chairperson made a distinction that should make every company board squirm a little.
Speaking at a talk at the ‘Gatekeepers of Governance’ summit, Tuhin Kanta Pandey separated “compliance” from “governance” in a way that was both elegant and damning.
Compliance, he suggested, is about meeting regulatory checklists. Governance is about acting from conviction. A well-governed institution doesn’t act out of compulsion; it acts because it believes in doing the right thing. Compliance is the floor, not the ceiling.
This is exactly right, and it’s refreshing to hear a regulator acknowledge what most of us have suspected for years. Indian companies have become skilled at the theatre performance of governance without necessarily practising it. We’ve created an entire ecosystem of independent directors who attend meetings, audit committees that review reports, and compliance officers who file disclosures on time. The paperwork is immaculate. The checkboxes are all ticked.
It makes me think of those elaborate wedding celebrations where everything is choreographed to perfection, the decorations are magnificent, and the rituals are performed with great solemnity. But anyone who’s been to enough weddings knows that the quality of the ceremony has very little correlation with the quality of the marriage that follows. Corporate governance has become our version of the elaborate wedding, complete with its own priests, rituals, and event managers to ensure everything looks proper.
The ESG act
Now we have a new act in this performance: ESG.
The chairperson was blunt about this too, noting that ESG must be authentic, not a branding exercise. Which is a polite way of saying that ESG has, in fact, become largely a branding exercise.
Companies now produce glossy sustainability reports with pictures of happy farmers and solar panels, create elaborate frameworks with impressive-sounding metrics, and appoint ESG committees to oversee it all. Does any of it translate into actual environmental or social benefit? What’s your guess?
As I’ve written earlier, I’m deeply sceptical of the entire ESG apparatus, not because the goals are wrong, but because the execution has become another layer of the compliance theatre we’ve already perfected. We’ve turned genuinely important concerns about sustainability and governance into another set of boxes to tick and another consultant-driven exercise.
The problem isn’t Sebi or the regulatory framework. The regulator is doing exactly what it should do by calling out this gap between form and substance. The problem is that no amount of regulatory tightening can create genuine intent. You can mandate independent directors, but you can’t mandate that they actually challenge management. You can require ESG disclosures, but you can’t require that companies genuinely care about the issues they’re disclosing. You can create elaborate governance structures, but you can’t legislate integrity.
Investor dilemma
This creates a particular challenge for retail investors like us. We’re told to look for well-governed companies, to check whether they have independent directors and proper committees, etc.
But if all of this is potentially just theatre, what are we supposed to do? How do we separate the companies that genuinely believe in governance from those that have simply hired better actors?
The truth is that there’s no easy answer. We can’t rely on regulatory compliance as a signal of genuine governance because companies have learned to game that system perfectly. The only real solution is the boring one I keep coming back to: diversification and a healthy scepticism of any company that makes governance and ESG too central to its marketing pitch. Companies that genuinely practice good governance rarely need to shout about it — it eventually shows up in their numbers.
Sebi is right to push companies towards substance over form, towards conviction over compulsion. But we shouldn’t wait for a miraculous cultural transformation before we invest. Assume that most companies will continue to perform governance rather than practice it, and build your portfolio accordingly. If some companies turn out to be genuinely well-governed, consider that a pleasant bonus rather than something you were counting on.
In a world of professional actors, the real protection is not believing in any single performance. As in all other areas of personal finance, our default should be scepticism.
Dhirendra Kumar is founder and chief executive officer of Value Research, an independent investment advisory firm
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