Quality of directors, not numbers, counts on boards

Written by MG Arun | Updated: Nov 28 2011, 07:02am hrs
On November 24, the Cabinet cleared the Companies Bill, to give more teeth to the laws that govern Indian companies and introduce compulsory corporate social responsibility (CSR) measures and class-action suits. The Bill is likely to be tabled in Parliaments winter session. JJ Irani, former director, Tata Sons, who headed a panel to draft the Bill in 2005, says that much of the original recommendations have been preserved, while some new measures were added in the light of the Satyam scam in 2009, in an exclusive interview with FEs MG Arun . Excerpts:

Finally, the Companies Bill you drafted six years back could become law soon...

I am sorry for being pessimistic, but a couple of years back too, the Cabinet had approved it and the Bill had gone to Parliament. Parliament was then dissolved, and the whole process was started again. This time, the government has a good majority, so, since the Cabinet has approved it, it should go through in the present form. I only hope we are not going to water it down to include some populist measures. The product has moved up and down several ministries, but I am told that 90% of what we had recommended is in the final Bill.

How significant is the clause on independent directors Will it give them more protection

One of the salient points in the Bill was about independent directors and their protection. At present, they are totally unprotected. There have been instances of some senior people being prosecuted unnecessarily. According to the Bill, independent directors cannot be prosecuted for day-to-day lapses unless they are in the know of things through agenda items and minutes. If they are aware of what's happening and don't act, they can be heavily punished because of their negligence.

Are numbers important when it comes to independent directors

I have maintained that the number of independent directors doesn't matter, but the quality of the person does. I have seen one independent director changing the course of a board meeting decision. There's hardly a vote on any issue; so, numbers don't matter. Good people should come back to the boards. I must say I myself have exited one or two boards, since I was not very happy with the governance issues.

New clauses have been built into the Bill following the Satyam scam. Your comments.

The Satyam scam occurred after we made our recommendations. It was both good and bad. The bad thing was that the whole matter was delayed. The good part was that it made us look at all the provisions more astutely. Auditors also got impacted.

There is a provision on changing auditors after every four years. Will this make governance stronger

Frankly, I am not in favour of changing auditors every four years, since that will result in a lot of confusion. I had pointed out to the ministry that all the major frauds that have taken place internationally have happened in the first or the second year after a new auditor joined. This is because the new auditors are not familiar with whats happening within the company.

There is the auditors' lobby, representing several small auditors, who feel they will get more work. This is not actually true, since most of the work goes to the Big Four and they in turn, distribute it. I don't think some of the smaller firms have the wherewithal to audit large companies.

However, changing partners is important and practical, since the partner gets too close to the management. When the partner changes, a lot of things are take care of automatically.

Will minority shareholders interests be adequately protected with the Bill

Majority shareholders also have their interests. There could be several such shareholders, and they should be protected too. By just changing auditors, their protection is not going to improve.

Would the Bill make directors more vigilant about companies activities

Yes. There would be instances when at board meetings members would tend to overlook the fine print in some matters that need to be passed. I would say that no matter should be passed without scrutiny. There would be someone who wants to push things through the board, without adhering to good corporate governance.

Companies will have to mandatorily spend 2% of their profits on CSR. How appropriate is this step

The 2% of profits is not mandatory, and companies need to disclose what they have spent. I am totally against it. Anything that is mandated, people will find ways to skirt it. My objection is that the percentage is wrong, because the profits fluctuate. So, should a company spend more on CSR when it is making good profits, and spend nothing when down in the dumps We have shown figures to the government to show that the Tata Group have spent consistently on CSR, irrespective of profits. .

What would be the best alternative then

I believe that CSR is an investment and not a cost. Ultimately, it pays. We have got figures to show how what we have spent 30-40 years ago on CSR is now paying us back. I don't think it will be popular with most corporates who think this is a cost. Corporates should contribute to the community in which they operate today, but you cannot have a limit on it. Suppose someone wants to spend 5%, by putting a 2% cap, you are limiting that expenditure.

Is there something that the government can do to encourage companies to do more on the CSR front

The government could give an incentive for companies that have been doing this for the past three or five years, make certain sanctions for land or raw materials easier for such companies.