Uday Kotak panel report is more disruptor than game-changer? Corporate governance norms may be obeyed in name only

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November 10, 2017 4:26 AM

“Not again!”—could be the reaction of the corporate sector on seeing the new proposals for corporate governance, made by the Uday Kotak committee that was constituted by Sebi.

seeing the new proposals for corporate governance, made by the Uday Kotak committee that was constituted by Sebi. Uday Kotak panel, Uday Kotak, Sebi“Not again!”—could be the reaction of the corporate sector on seeing the new proposals for corporate governance, made by the Uday Kotak committee that was constituted by Sebi. (Image: Reuters)

“Not again!”—could be the reaction of the corporate sector on seeing the new proposals for corporate governance, made by the Uday Kotak committee that was constituted by Sebi. This is not the first time that corporate governance norms are getting revised. In the past, substantial modifications have been proposed and implemented. There is no denying the fact that norms on corporate governance will always be an unfinished business as experience is gained on the ground. Sebi should be emboldened now to modify the existing norms since India has significantly improved its ranking (to fourth place) on protection of minority shareholders in the recently-released World Bank Ease of Doing Business index. Protection of minority shareholders is very important for corporate governance. The committee deserves kudos for its effort to put together a comprehensive report. However, the success of any law on corporate governance largely depends on the intent than the letter of law. It must be realised that it will always be a matter of intent and spirit, and cannot only be compliance with the letter of law.

Even the report takes note of this, and says that ‘by and large, most leading corporates in India follow rules and regulations, and if their governance practices are put to test, they will likely stand scrutiny of law. However, if one delves deeper, one could find that while the letter of law may been complied with, the spirit of regulations has not necessarily been embraced wholeheartedly”. The case in point is the appointment of women members to the boards of companies. Both the Companies Act, 2013, and the Sebi regulations require a company to have at least one woman director on its board. But in reality, as a “tick the box” approach, the woman director appointed is generally a relative or a family member of the promoter. That is why the committee has now recommended the appointment of an “independent” woman director.

Therefore, for success of any norm on corporate governance, what is more important is a change in the attitude. It will yield little result if merely the regulations are changed or punishment for violation is enhanced. At the same time, for any regulation aimed to enhance corporate governance, it is equally important that it should not result in difficulties in doing business. If it makes doing business difficult then either companies will find ways to defeat the true spirit of a provision or the compliance will be done only for the heck of it.  So, to make the recommendations simple, it is suggested that some that are already provided in the Companies Act or are in conflict with the Companies Act can be left out. The ministry of corporate affairs has already stated that recommendations that are contrary to the relevant provisions of the Companies Act or are already covered in the Companies Act should not be adopted.

Some recommendations would be easy to implement like increasing the frequency of meetings, ensuring better attendance of directors, enhancing disclosures and harmonisation of disclosure under various regulations, directors’ and officers’ liability insurance, training of directors, composition and role of various board committees. While these can be easily implemented, it is not certain that they will improve corporate governance. Some recommendations could bite the hardest. These include increasing the minimum of directors from three to six. Companies will find it difficult to double the board size. Also, if all directors vote on a resolution, then six being an even number, the deadlock, if any, can only be resolved with a casting vote. This could lead to operational unease. The proposal for separate roles of chairperson and managing director could affect family-promoted companies.

The committee has linked the separation of roles with public shareholding. It recommends that effective from April 1, 2020, listed entities with more than 40% public shareholding should separate the roles of a chairperson and MD/CEO. Pegging it to mere shareholding may not be correct, and this should have been left to be decided on a case-by-case basis. Take the case of a very profitable company which is steered by a bright and dynamic promoter who would like to retain the office of both chairperson and MD to retain complete control over the company and to avoid dual centres of power. Now, just because this company has a 40% public shareholding, the company’s helm must be manned by two different persons.

If this provision poses serious problems for companies, nothing will stop them from creating a position only in name to comply with the letter of law—that would defeat the very objective of this provision. The committee has suggested a minimum compensation for independent directors, but has not fixed any maximum remuneration. It should not happen that a high remuneration itself makes the director compromise her independence. Another significant proposal is the change in the definition of a material subsidiary. The test of materiality is proposed to be reduced from 20% to 10%, i.e., to mean a subsidiary whose income or net worth exceeds 10% (instead of the existing 20%) of the consolidated income or net worth of the listed entity and that subsidiary. While proposing a new concept of group governance unit, the report does not have any meaning of the term “group”.

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