When founders take on the board

A diligent board needs to facilitate transition when founders pass on the baton, say experts

As the boardroom battle at Infosys plays out in the public domain it may be worthwhile to look at the statutory requirements for disclosure relating to remuneration, severance fee or other benefits to directors and key managerial personnel (KMP) in a company. Experts point out that just complying with the statutory requirements is a necessary, but not sufficient, condition for meeting the corporate governance standards set by a company.

Among the key lessons for corporate India from the Tata-Mistry spat and the ongoing tussle between the founders and the board at Infosys is that boards need to become more proactive in communicating with large shareholder groups and resolving differences with more tact and skill, say company law experts.

What the law mandates

According to Companies Act and the Sebi Listing Obligations and Disclosure Requirements (LODR) Agreement, 2015, companies are required to disclose the remuneration of directors and KMP in their annual returns. Under Section 134(3)(e) of the Companies Act, companies are required to constitute a nomination and remuneration committee (NRC).

The board of directors’ report, which is laid before the shareholders together with the financial statements for each year, is required to contain the company’s policy on director’s appointment and remuneration.

Rule 5 of the Companies (Appointment and Remuneration of Managerial Personnel Rules), 2014, requires every listed company to make several disclosures relating to remuneration to managerial personnel in the boards’ report. These include the ratio of the directors’ remuneration to the median remuneration of employees, the percentage increases in remuneration of each director, a comparison of KMP remuneration with the performance of the company, key parameters of any variable component of remuneration, among others.

Rule 3 of the Remuneration Rules requires every company to file with the Registrar of Companies details of the remuneration of the directors and the KMPs. Section 202 of the Companies Act allows a company to make severance pay to a managing or wholetime director or a manager as a compensation for loss of office in certain circumstances. However, such compensation cannot exceed a threshold prescribed in the Act.

“But there is no specific requirement for disclosure of such remuneration,” says Aakanksha Joshi, partner in law firm Economic Laws Practice.  However, the Sebi listing agreement requires disclosure of severance fees of directors in the corporate governance report. Legal experts point out that a company is not legally bound to explain how the remuneration and severance package of a director or a KMP has been arrived at. 

Dealing with the spat

Amidst allegations of corporate governance failure in Infosys, most legal experts agree that there may have been an element of non-transparency in relation to disclosing the remuneration and severance packages of some key managerial personnel. “The board may have been economical with the truth,” says JN Gupta, founder, Stakeholders Empowerment Services, a proxy advisory firm. “Infosys may have been legally compliant, but corporate governance practices go beyond legal compliances,” he adds.

Most experts feel that the issues raised by the founders are not worth discussing in public. “Questioning operational decisions does not create shareholder value. This may have the opposite effect in difficult times,” says Shailesh Haribhakti, founder and chief mentor, Baker Tilly DHC. According to Shriram Subramanian, managing director, InGovern Research Services, the founders should also come forward with solutions.

Arun Duggal, an independent director, feels the tussle is an issue of corporate governance capacity. “The board should have been more proactive in communicating with important, large shareholders, who also happen to be the founders,” he adds. A common thread in both the Tata-Mistry and Infosys cases is the difficulty that founders or promoters face in letting go and moving on. “The respective boards should have facilitated the transition,” says Duggal.