Step forward for boards

Corporate governance standards set for a big improvement

Many of the recommendations of a committee, chaired by Uday Kotak and set up to improve corporate governance standards in India, have been accepted by the Securities and Exchange Board of India (Sebi). This marks an important step towards improving the structure and functioning of corporate boards in India. The committee report comes after several major scandals rocked India Inc, which were marked by inattention or other oversight failures from boards. The concern widely expressed at the time was that boards are too subservient to promoters, or can be too easily misled by promoters or management. The committee has sought to reduce the prevalence and severity of that problem. The position of independent director was likewise to be strengthened. The overall aim was to further protect the small investor and ensure that boards represent and speak for all shareholders.

Some of the steps are particularly worthy of note. One such is the decision to split the role of board chairman from that of managing director and that of chief executive officer. This will apply to the top 500 listed firms from April 2020. It is to be hoped that this recommendation will expand over time to apply to an even larger proportion of firms, as it is a crucial step towards separating the functions of a board from that of management. The original suggestion was that all listed companies with greater than 40 per cent public shareholding separate these roles, and it would be wise to move gradually towards this requirement and thence to all listed companies. Some of the large companies affected by this requirement are Reliance Industries, Hero MotoCorp, JSW Steel and even ONGC, the public sector oil and gas major. The role of independent directors is to be revised, with a maximum number of such directorships a person can hold, and the requirement that at least one director be a woman. Concern has often been expressed that individuals who sit on a large number of boards as independent directors are unable to properly conduct their duties on behalf of small shareholders because of the multiplicity of their commitments. The committee has also made important recommendations about the fees due to directors being approved by shareholders in general, as too often director compensation was over-large and shifted resources to promoters, regardless of the performance of the company in question.

Important requirements on transparency and disclosure have also been put in place following the committee report. A plague of dubious related-party transactions has led in some cases to high-profile boardroom battles and accusations that boards or shareholders have not been kept fully informed. Steps have been taken to address this. Quarterly financial results will also be now disclosed mandatorily. In a step that will be welcome to smaller shareholders in multinational companies in particular — but perhaps distress the MNCs’ overseas parents — royalty payments of over 2 per cent to related parties will have to receive shareholder assent. Taken together, these represent an important step forward in corporate governance. The committee had also made recommendations about the supervision of unlisted firms, which, however, the market regulator could not act on due to objections from the corporate affairs ministry. The government should seek out a way to implement those sensible suggestions as well.

Disclosure: Kotak Mahindra and associates are significant shareholders in Business Standard Pvt Ltd