Compliance in Letter and Compliance in Spirit? - Evidence from Board and Audit Committee Meetings in India

This paper analyzes two notions of compliance, 'compliance in letter' and 'compliance in spirit', using data on Board and Audit Committee meetings in India under its Clause 49 corporate governance regulations. The analysis is based on the sample of top 500 companies listed on the country's oldest stock exchange – the Bombay Stock Exchange – and covers a period of seven years starting from 2006 when the modified version of Clause 49 that contained a large number of corporate governance regulations came into effect in India. The analysis shows that while most of the companies complied with the explicit regulations relating to the number and interval between meetings, a significant percentage of the companies held all their Board and Audit Committee meetings on the same day which is not prohibited under the Clause 49 regulations but not expected given the onerous responsibilities that same-day meetings put on directors who serve both on the Board and the Audit Committee. The incidence of same-day Board and Audit Committee meetings does not correlate with poor past performance of the company and multiple directorships of directors which could be potential drivers of same-day meeting for generating higher attendance to harness the expertise of as many directors as possible. Instead the incidence of same-day meetings correlates strongly with poor governance structures captured by lower board size, lower percentage of independent directors on the Board and the presence of inside directors in Audit Committees. Same-day Board and Audit Committee meetings do not result in higher meeting attendance by directors. The empirical analysis suggests that while 'compliance in letter' is high, 'compliance in spirit' could be low