Corporate Governance: Form, Substance And Turf Wars
Some recommendations of the Kotak committee are worthy. But let us not confuse form over substance, and allow turf wars between SEBI and the Ministry of Corporate Affairs to result in more form filling and fatter annual reports.
It is strange yet true that the first corporate governance initiative in India came neither from the government, nor the Securities and Exchange Board of India, nor shareholder activists, but from an industry association. At the end of 1996, the Confederation of Indian Industry set up a task force under Rahul Bajaj to draft a voluntary code for India’s listed companies. I helped draft the document which was released in April 1998. Till today, I can’t fathom why an industry association wanted to release a progressive governance code incorporating some of the best international standards. Be that as it may, the CII code won kudos from the press.
Soon afterward, SEBI got into the act. It appointed a committee in 1999 under Kumar Mangalam Birla which drafted a code of corporate governance under two broad heads: mandatory recommendations for listed companies and non-mandatory ones. Much of this work was similar, often identical, to the CII report. In any event, SEBI used it to put in place the first official corporate governance code in India in 2001 under Clause 49 of its Listing Agreement. Thereafter, in 2003, it updated Clause 49 based on the recommendations of the NR Narayana Murthy Committee, which came into effect on December 31, 2005.
At that time, SEBI represented the progressive regulator in dynamic Mumbai, while the Ministry of Corporate Affairs was considered an antediluvian statist entity located in New Delhi.
Everyone needed to acknowledge the MCA since it administered the Companies Act, 1956; but nobody quite cared for it. SEBI held the upper hand — at least in corporate imagination.
Then came the Satyam scandal. On January 7, 2009, B Ramalinga Raju admitted to cooking of the books and multiple misdeeds of an unheard of scale. Showing rare speed and panache, the MCA under its minister Prem Chand Gupta got into firefighting mode. Within months, a special MCA committee ensured that Satyam was sold to the Mahindra group — a speed of resolution hitherto unseen in India.
SEBI was outflanked. The MCA then piloted a new Companies Bill which was passed as the Companies Act, 2013. While the law improved many areas of governance, it carried draconian provisions and restrictions. Now the ball was entirely with the MCA.
SEBI was searching for ways of reestablishing its corporate governance preeminence. Its most recent instrument is the Report of the Committee on Corporate Governance (October 5, 2017) with Uday Kotak as the chair. I have read all the recommendations, and found nothing objectionable in the ones below:
- Why shouldn’t a listed company have at least six directors?
- Why shouldn’t there be five board and audit committee meetings per year?
- Why shouldn’t at least half the board comprise independent directors?
- Why should a person hold directorships in more than eight listed companies and independent directorships in more than seven?
- Why should there be alternates to independent directors?
- Why shouldn’t there be a minimum compensation for the independent directors of the larger listed companies?
- Why shouldn’t the candidacy of a director who hasn’t bothered attending even 50 percent of the meetings for two consecutive years come up for ratification by shareholders?
- And why shouldn’t listed public sector entities not be subject to the same regulations as others?
There is an area where I have a difference of opinion. It has to do with the recommendation that for listed entities where public shareholding is at least 40 percent of the voting stock, the chairperson must be a non-executive director — ideally an independent director, though the report doesn’t say so in black and white.
Forms of corporate governance vary across regions.
In the United Kingdom and much of western Europe, chairs of listed companies are independent directors. Not so in the United States, where the chairman is often the chief executive officer.
There is little hard evidence to suggest that one works better than the other. I would not have knocked on this door. It serves no real corporate governance purpose and confuses a preferred form in some geographies for universally applicable substance.
As expected, the MCA has protested. In a churlish display of pique, it has claimed that the SEBI is intruding on matters that are core company law principles and that multiple jurisdictions should be avoided to ensure the ease of doing business. For instance, to the proposal of having at least six directors, the MCA claimed that it will warrant additional costs to companies. To debarring alternates to independent directors, it said that it conflicts with the Companies Act 2103. To fixing the minimum compensation and sitting fees, it says that there is no need. There are many more.
I have a point to make on this matter. SEBI clearly cannot weaken the provisions of the Companies Act, 2013. But for the most important sub-set, namely listed companies, it can strengthen provisions — as it did with Clause 49 in its various avatars.
However, in doing so, consideration must be given to form versus substance. We are hurtling headlong into a regime of the primacy of form, where all manner of declarations need to be made in increasingly bulky annual and half-yearly reports of listed companies without really asking whether these improve the actual substance of board composition, the efficacy of directors, board and committee practices and disclosures.
The best corporates of India perform their governance functions better than most counterparts elsewhere; others don’t, but blithely disclose that they do.
No SEBI or MCA diktat can change that.
We are witnessing a U.S. style of mandated regulatory overreach, made worse by differences between the MCA and SEBI. My suggestion is that let some of the key recommendations of the Uday Kotak committee be adopted. Then let there be a significant passage of time before a future SEBI chairman wishes to confer upon his office and himself another halo of corporate governance.
In the meanwhile, let companies grow and generate long-term shareholder value. To the MCA and SEBI, I implore: stop tinkering, for it does no good, not even for your turf.
Omkar Goswami is the founder and chairman of CERG Advisory, and has been an independent director on the boards of several large Indian companies.
The views expressed here are those of the author’s and do not necessarily represent the views of BloombergQuint or its editorial team.