Promoter-led companies make up an estimated four-fifths of businesses in India. As these firms grow and prepare for initial public offerings, they have to turn from closely-held family businesses into publicly-accountable institutions. Most of them handle this shift badly.
Many promoters treat corporate governance as a milestone to be reached by appointing well-known independent directors (IDs): former bureaucrats, retired CEOs, industry veterans. The hope is that these names will bring instant credibility. What usually follows is friction.
Senior directors find themselves in a company that still runs the way it always has; they grow frustrated and board decisions stall. For Indian governance to move past box-ticking, promoters and incoming IDs will both have to approach this transition differently.
The most common mistake promoters make is bringing in outside governance before building the discipline internally. Appointing IDs while decisions continue to be made the old way is like fitting a racing engine to a car with no brakes. Before the first ID joins the board, promoters need to work on three things.
First, their own understanding. Governance cannot be handed off to board committees. Promoters should learn about fiduciary duty, risk oversight and minority shareholder rights with the same seriousness expected of IDs, who must clear the Indian Institute of Corporate Affairs’ proficiency assessment. They should know what listing will expose them to—legally, financially and reputationally—well before going public.
Second, an honest gap analysis. Before approaching prospective IDs, promoters should audit their own practices and list ones that would not survive public scrutiny: informal related-party transactions, promoter pay that follows no set structure, personal and company assets that overlap, and decisions taken outside formal channels.
This exercise is often uncomfortable. In a family business, many of these practices grew up for sound reasons, such as speed, trust among relatives or the need to keep a young company alive. Some are tied to particular family members and their roles. Naming them can feel like criticising the people who built the firm. It is far better done privately by the family than publicly by a regulator or an analyst.
Third, a transition plan with deadlines. Every growing company carries some operational baggage. Promoters should acknowledge theirs openly and set a realistic timeline for phasing out each non-compliant practice before listing. This reform may take several years. Promoters should consider listing and invite IDs onto the board only once the path is set. If IDs arrive and discover these problems for themselves, the relationship turns adversarial. In effect, the promoter has to learn to share with a board the decisions they once made alone.
IDs, for their part, tend to make one of two mistakes. Some assume a legacy business will arrive with a clean balance sheet. Others sit back as figureheads until something goes wrong. Joining the board of a promoter-led company calls for a practical approach and a willingness to mentor.
Prospective IDs should do their own due diligence before accepting a seat, and look well beyond the investor presentation. Past financial statements matter, and so do the promoter's real appetite for transparency, the company's operating culture, and how willing the family is to hand over key governance functions. Conversations with the statutory auditor, the chief financial officer and senior managers outside the family can reveal more than any presentation. A director who is refused such access before joining should take that as a clear signal.
They should also expect to find problems. Few private promoter-led firms are fully clean when they begin this journey, and a director who expects mature systems on the first day has misread the situation. IDs who go in prepared for legacy issues can act as teachers and change managers, guiding the company toward institutional maturity.
Being practical does not mean looking the other way. IDs should set a few firm lines from the outset: full statutory compliance, complete disclosure of related-party transactions and honest financial reporting. Operational governance can be improved in stages. These principles have to hold from the first board meeting.
One simple tool can bring both sides together. When IDs join, the promoter and the board can agree in writing on the transition roadmap: which practices will change, by when, who in management is responsible and how progress will be reported to the board each quarter. Such a compact gives the promoter a clear sense of what is expected and when. It gives the IDs a basis for holding management to account without every question feeling like an accusation. And it gives both a shared record to return to when, as will happen, a deadline slips or a disagreement arises.
This relationship matters a great deal in India, where promoter-led firms dominate and governance lapses have been frequent. When it breaks down, the damage spreads well beyond one boardroom. Promoters who come to see governance as a trap to take away their control and directors who feel misled about the state of the company—both walk away disillusioned. Promoters then start to regard independent oversight as a threat to the business itself. If the transition stays adversarial, many of the promoter-led firms that drive India's jobs and growth will either put off listing indefinitely or comply on paper while ignoring the intent of the rules.
Corporate governance is a discipline, and it asks for realism on both sides. Promoters must audit themselves and learn before they open the company to outside oversight. IDs must arrive having done their homework, with patience for a company in transition and a firm hold on basic ethics. If both sides meet these obligations, India's promoter-led companies can keep their entrepreneurial energy while building institutions that last.
Tulsi Jayakumar | Professor, economics & policy; and Executive Director, Centre for Family Business & Entrepreneurship, Bhavan’s SPJIMR
(Views are personal)
