Sebi has come out with a major consultative paper reviewing corporate governance norms in India as they apply to listed companies. It merges its own developmental philosophy with the thinking of the Companies Bill that is pending passage in Parliament. Of course, the Companies Bill has governance provisions for all public limited companies (private limited companies are broadly exempt) and, surprisingly, several enhanced standards for listed companies. Some of the proposals in the Bill are tougher than those contained in today’s corporate governance norms set in the Sebi-mandated listing agreement. For the sake of analysis, let us divide them into the good, the bad and the ugly.
Black and white terms: Sebi proposes a formal letter of appointment be issued to directors, which should explicitly state the rights and obligations of the directors and this letter be disclosed to all. This is a good thing. Rights and fiduciary duties should be stated in black and white and directors should know both their duties and their rights so that a shareholder can protest in a shareholder meeting or otherwise if he or she crosses the contractually stated Lakshmanrekha of what is agreed.
Term: The term of independent directors has been proposed to be limited to two terms of five years with a three year cooling off. This is a much-needed move as directors who hang around for a period longer than 10 years are highly unlikely to be independent of entrenched interests. Though only a few people have abused their stay beyond reasonable welcome, this was a necessary prophylactic for better governance.
Role of independent directors: There have been several new proposed roles for independent directors, including leadership roles in the company where they meet in the absence of the non-independent directors and review the performance of the others. On the same lines, introduction of performance evaluation of directors is a good move and would put pressure on boards to work on tangible outputs and well- established processes to achieve those targets instead of propounding abstract theories and Dilbertisms.
Noisy withdrawal: Another great development is the direction to directors, particularly the independent ones, from resigning for ‘personal reasons’. Sebi has played this with nuance. It has not proposed forcing directors to make a ‘noisy withdrawal’, but seeks to create an environment where appropriate disclosure has to be made to shareholders explaining the resignation. A subtle pressure is put on directors resigning on personal grounds to explain why those same personal grounds are not reason enough to withdraw from all companies where they sit as directors. This is a great move without tipping over into micro-management.
Related party deals: Shareholder approval of non-interested shareholders voting for the pay of promoter-directors is a good move. Several hurdles have also been put in the way of self dealing — through approval of non-interested shareholders, disclosures, restriction of superior rights, approval of audit committee and a new fiduciary duty of majority shareholder towards minority shareholders. These are bold moves and are likely to be opposed by many a powerful promoter. But they are a move in the right direction given our history of problems in this area.
Nominee director independence: Nominee directors are proposed to be branded as congenitally non-independent. This is a departure from the current position where nominees from certain financial institutions are not considered non-independent. While, there are problems with the current regime, the proposed regime would bring its own problem — that is, branding nominees of creditors as interested in more than the repayment of their loans on time. Something that they clearly don’t represent. Their role begins and ends with ensuring repayment of interest and capital. Clearly, the current regime is more nuanced and appropriate, though some black sheep do wander in the guise of independent nominee directors. On the whole, the status quo is probably better as the exemption providing the clothes of independence is only given to certain financial institutions and banks.
ESOPs to independent directors: If the company will prosper its key stakeholders should do well. Many employees will get greater pay and employee stock options. Similarly, top management can also be rewarded with higher pay and stock options. It is not clear why independent directors are not deemed suitable enough to be awarded stock options. Shouldn’t they do well? if the company does well and also lose some investment when the company doesn’t do well. The bar on awarding stock options to independent directors needs to be lifted and they should have an interest with skin in the game as well. This will be good for the performance of the company as the directors collectively drive the strategic vision of the company.
Minority representation: Sebi discusses at some length the appointment of directors representing minority shareholders. And it seems it comes to no firm conclusion. It finds that appointment by ‘majority of minority’ may create an abusive system in which a rival can acquire shares and sabotage the company. However, the alternative system it comes up with also does not pass the same test. Sebi has proposed one director appointment from those shareholders who own, say, shares worth not more than ₹20,000. This gives power to those who hardly have any skin in the game and thus may not be the best counter-balancing force against a problematic majority. In addition, this would give power to those shareholders who are the least affected and are, therefore, most likely to be fronts for other interest groups. It may instead be better to push for cumulative voting, which gives a better voice to
70 is the new 50: There is discussion about the minimum and maximum age of directors. These are quite pointless micro-management. Anyway, if you can be a prime minister of the country of over a billion at 70, why should good people be disallowed from director roles at that age? If age restrictions were implemented in California’s corporate laws, I’m sure Silicon Valley would be poorer. In fact, the story of India’s youngest CEO starts tragi-comically (he was featured in Time as the world’s youngest CEO at 14) with Indian law prohibiting him from being a director in the company he founded and he was forced to incorporate in the US. Clearly it is time to make that concept history.
Conclusion: Overall, I would give the paper high marks, particularly if it avoids in its finality areas of over-regulation and dumps them in favour of innovation, disclosures, checks and balances and the right level of regulation.