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Monday, 09 October 2017 04:03
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Kotak recommendations balances ownership with propriety

Perhaps the most stunning recommendation of the Uday Kotak-led panel on corporate governance is the one which says at least half of the company’s board must comprise of independent directors, up from a third right now. And since this is combined with more measures to ensure the directors are truly independent—each director has to make a stipulation on independence which has to be ratified by the Board—corporate India may feel that this is akin to losing control of the company. More so since, with a 50% voting right, independent directors can no longer argue that they couldn’t do anything since they were in a minority. So whether this is accepted by the government is something to watch for. Other recommendations, such as the need for at least one independent woman director or splitting the post of the chairman and managing director or that two-thirds of the nomination and remuneration committee must be independent directors are also in the same spirit of separating the ownership of the company from the running of it. Given the number of stories of independent directors of companies who do not even attend board meetings, the stipulation of attending a minimum number of meetings is a good one.

But, it is fair to ask, if many of these suggestions have been made before—indeed, many are already part of Sebi’s Clause 49 of the listing agreement—what is new about these ones? In most such cases, the policy evolves in relation to recent irregularities; so, to that extent, Kotak is an evolution and even reiteration of some existing standards. Setting guidelines, of course, is of little use if those violating them get away with impunity. Which is why, it is important the government consider the recommendation of beefing up Sebi in a very big way—the US SEC’s strength, Kotak says, is 4,554 vs Sebi’s 780, and that is when Sebi is regulating a lot more companies than SEC is. Giving Sebi the power to act against auditors is critical since the existing system doesn’t seem to be penalising errant auditors adequately. Perhaps the most important recommendation is that all data submitted to any regulator must be in XBRL form since, by tagging information in a certain way, it is possible to actually relate disparate numbers to one another—it will be easier to figure out, for instance, if a `100 crore commission payment has been made to a related party. If influential sections of India Inc would like the government to hold back on some recommendations, expect something similar in the case of PSUs where the panel wants the board to be independent of the administrative ministry.

 

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