Regulators, especially the market watchdog, have been pursuing corporate governance vigorously, at times even sentimentally, for about a quarter century. However, in practice, governance often suffers from a “fight or flight” tendency, tacitly, towards compliance commitments. The story of this chase is an evergreen topic. With exalted speeches by the gurus “giving voice to values” in conferences and roundtables, and normative “what-should-be” assertions in the media on the one side; and frequent slippages from that ideal wonderland to ground realities hitting headlines on the other. That reality is what truly matters to companies, investors, the market, and in some cases the larger economy. Like the recent episodes of the HDFC Bank chairperson’s dramatic resignation or the Tata Trusts and some of its affiliates.
There are a few fundamental reasons for these round trips on governance, despite the yearning for improvements from multiple quarters. It is important to acknowledge them for planning a reset and for any meaningful transition.
For long, Indian regulators have been treating the position of independent directors (IDs), including women IDs, in listed companies as a creative brahmastra — the ultimate remedy for safeguarding the interests of a company and its minority shareholders. However, the history of corporate violations and compliance failings show that this weapon remains blunt, despite multiple rounds of regulatory fine-tuning.
While IDs and their mandates have been considered a progressive step towards better governance, there are few notable episodes challenging entrenched interests or questionable actions by promoter directors or executive directors in non-promoter companies. Occasional resignations from the boards have been mainly on account of personal/health reasons. Moreover, boards of companies, particularly which compensate IDs well, have become increasingly populated with select “former civil servants, former regulators and former lenders”.
At times as choice of promoter/management, and at times airlifted to the boardroom. For many, the role often shifts from strategy and oversight to providing a policy-regulatory hedge to the company. The growing disenchantment with IDs, handicapped by both expertise gaps and information asymmetry, is extensively commented upon. Suffice to say that Sebi recently introduced an accountability mechanism in market infrastructure institutions (MIIs) where the accountability of two core verticals — compliance and technology — are fixed upon an ED each, who will report to the board and Sebi.
Despite a spirited, but deferred, attempt by Sebi a few years ago to decouple the positions of chairperson and MD/CEO, a major part of the Indian corporate structure remains firmly tethered to the promoter family. We are witnessing a high level of expertise and creativity in changing the colours of directors; seamlessly from executive director (ED) to non-executive non-independent director (NE-NID), to independent director and even to chairman emeritus. The last innovation is an additional chair created through contractual arrangements outside the formal legal framework.
Even some “professionally run” companies are also following this track, allowing their past strongmen to get into the board as ID and emeritus chair. Furthermore, the role of perpetual family trusts as public entities having considerable say in in the governance of affiliates creates a governance layer that is often too opaque to the average investor and difficult even for the regulator to pierce. Shyamal Majumdar’s incisive analysis of the role of trusts and need for greater transparency in public markets in FE (“Trust is not a balance sheet”, May 23) is a timely reminder that public and private markets are interlinked in many ways and governance must address all those realms.
A few days back, the US Department of Justice reportedly granted permanent and “sweeping immunity” to the President and his family members from tax authorities pursuing audit or tax claims against them in future. Perhaps the most difficult challenge for regulators and corporate boards alike everywhere is the spread of Trumpism — a paradigm where rules are being rewritten for a predatory and transactional world.
Environmental, climate change issues have been thrown out. Insider trading is reportedly being enabled by policies and executive action, with advance information shared with a select few. Even wars and talking up war-like scenarios have become information for winning lucrative financial bids for many “insiders”. These new proclivities emphasise that governance norms are not only for companies; governance matters for all agencies and institutions: nations, authorities, universities, every legal entity. Exalted norms for corporates, and that too private ones, cannot succeed in a milieu that belittles or ignore such norms for other entities.
The next iteration of reforms has to address all these issues. It will have to address a fragmented landscape of governance emanating from the external world. Internally, varying interpretations and practices of fit and proper, composition of boards, those charged with governance, etc. between Sebi, other regulators, and the National Financial Reporting Authority need to be harmonised. The provision in the Securities Markets Code, Bill, to introduce an omnibus compliance exemption for public sector companies is worrisome. That too in the context of their existing laxity in complying with regulatory provisions.
With the compounding of both the existing and emergent concerns, Indian corporates and authorities cannot afford to rely only on traditional norms of governance. For the board of directors, the challenge is to win over the ghosts of lethargy and conflicts from within and reclaim the moral compass. For the regulator, the task is to close the ED to ID and the emeritus chair loopholes, the tick-box compliance culture, and simplify and harmonise the mandates across regulators, including the special status for public sector companies. Regulators should also keep realistic expectations while drafting tonnes of regulations in a granular style. As we approach 2027 — 10 years since the Uday Kotak Committee — perhaps it is time for a new high-powered committee on governance. One appointed jointly by the regulators concerned may serve the purpose of inter-regulatory harmonisation better.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express. CKG Nair is Former Director, National Institute of Securities Markets and former Member, Securities Appellate Tribunal.