We took an “evolutionary not revolutionary” approach to how listed companies are run said Uday Kotak, of the SEBI-constituted corporate governance committee he chaired.
Kotak was describing the committee’s approach at a recent conference hosted by law firm Cyril Amarchand Mangaldas. The committee submitted its recommendations earlier this month including a proposal that in large companies 50 percent of board members should be independent directors.
It was a committee set up on June 2 with a four month deadline and 25 diverse members which were lawyers, accountants, (representatives from the) corporate sector, industry associations, proxy advisors, professors, academicians, government officials. You can imagine a 25-member committee and a four month deadline. We had 30 meetings. Average meetings would be about 6-7 hours long but it was great fun working together.Uday Kotak, Chairman, SEBI Corporate Governance Committee
Kotak articulated the many principles and areas of focus based on which the committee made recommendations -
Fairness to all shareholders
“This whole business of arbitraging between different set of shareholders and creating advantage for some at the cost of others we feel is fundamentally inconsistent with corporate democracy.”
Clarity in the roles of shareholders, board and management
“The recommendation including the separation of the role of non-executive chair and chief executive officer also flows from a belief that the time has come to sharpen the distinction between governance of boards and management of companies. Of course, there is very close need of interplay, so we have suggested how boards/directors meet managements periodically.”
Disproportionate focus on short termism
“We have recommended that the board spend time on long term strategy, have strategic plan for defining long and medium term and engagement by the stakeholders committee with long term institutional shareholders.”
Fiduciary responsibility of independent directors and auditors
“We have tried to lay down some principles about independence and spirit (of independence) but it’s very difficult to put rules down for spirit. Essentially, (the committee did) significant amount of work around independent directors, directors in general and a very big focus on the role of auditors. One of the challenges India has faced is regarding the role of auditors and the committee spent disproportionate amount of time in trying to find good answers to make auditors more accountable in listed companies.”
Transparency in related party transactions
“Here the approach is to push for more disclosure on one hand and a higher level of shareholder approval in some cases. In some cases it was an ordinary resolution, we’ve recommended a special resolution. We have also found the whole area of related parties, particularly promoter, compensation as an issue and the levels of transparency around that, in case of promoter, executive directors and compensation to non-executive directors.”
Role of the promoter
“We all know that promoters freely get information on listed companies, through board members or otherwise, and there is no way of putting this in place. So, we have recommended some way of selective information sharing, with checks and balances, with tightening of rules around insider trading.”
Public Sector Enterprises
“The big elephant in the room is the public sector and we have got a chapter on public sector enterprises. It started with one line - that public sector enterprises shall follow all the rules of listed companies. The committee was unanimous on it.”
Ease of doing business
“If we are pushing for digital disclosure of annual reports we can ensure that shareholders get dividends faster, rather than wait till the last week of September. Sixty to seventy percent of listed companies have their annual general meetings in the month of September.”
Strengthening the role of SEBI
“How do we ensure that the Securities Exchange Board of India has the capacity to be able to govern all this? India has same number of listed companies as the U.S. The SEC has 5000 employees and SEBI has 780 employees. The corporate finance department of SEC has close to 500 employees which look at corporate and governance areas. In SEBI it is 30. So we have recommended some capacity building.”
Kotak ended his speech by underscoring the need for better governance of companies at a time when there’s been a dramatic increase in funds being invested in public companies.
The kind of flows we are seeing through mutual funds and insurance into equity markets, entrust that we all are doing the right thing for listed companies. Our responsibility for the governance of the country where disproportionate savings are going into this 5000 companies is at much more enhanced level.Uday Kotak, Chairman, SEBI Corporate Governance Committee
The committee’s report has been met with dissent from the government. Both, the Ministry of Corporate Affairs and of Finance have expressed certain jurisdictional concerns as well the need to ensure ease of doing business in India. SEBI has invited public comment on the report after which the regulator will decide on the recommendations made.
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