Saturday, February 02, 2013

Sebi paper on corporate governance

Sebi has just come out with a consultative paper on corporate governance. I know most people can't help yawning- so much has been said about corporate governance and yet we have so little to show.

Still, I would recommend the Sebi paper because it not only gives the background to the situation in India but also documents some undramatic but useful initiatives Sebi has taken of later. The consultative paper itself contains some useful proposals, some of which I will mention:
  • Giving minority shareholders in large companies the right to nominate at least one director: This is a useful step towards broad-basing the board, which today consists entirely of  nominees of  promoters.
  • Requiring independent directors to give reasons when they resign: True, they can always cite "personal reasons" in order to avoid unpleasantness. But if things blow up later, they can't say they were aware of what was going and that is why they resigned; if they knew, they should have said so in their letter of resignation.
  • A maximum tenure for independent directors: Two terms of five each. I am not sure I favour the same directors returning after a hiatus of three years. Surely, there is enough talent available in the country, notwithstanding claims to the contrary made by companies?
  • Restricting the number of independent directorships: This should not be more than six or seven in my view. It is shameful that many people don't think it necessary to impose limits on their own when  they know you can't do justice otherwise.
  • Performance evaluation of independent directors: This is to be done by peers, which could lead to back-scratching. But even a few adverse evaluations should have some effect,
  • Making a whistle-blower mechanism compulsory: This is long overdue. It should be possible for employees to disclose wrong doing to a designated independent director. It should be mandatory for the said director to bring the matter to the board for discussion.
  • Mandatory succession planning and disclosure of these plans to shareholders
  • Mandatory e-voting
These are some of the more important proposals. The disappointment is that we are not seeing a wider participation of shareholders in the appointment of independent directors. I would like to see institutions nominate their directors who would be regarded as independent. Strangely, the Sebi paper thinks institutional nominees should not be regarded as independent presumably because they represent the interests of one groups. But institutional interests are also, in general, aligned with those of the broader shareholder body, aren't they?

You cannot have an effective board as long as management or promoters appoint independent directors and reward them lavishly. The appointment of independent directors should be done by different stakeholders, including minority shareholders. I believe not insisting on this is the big lacuna in an otherwise interesting paper put out by Sebi.

More in my column, Sebi dodges the central issue.

17 comments:

Anonymous said...

Splitting the role of Chairman of Board (In-charge of Governance) and MD of Company (In-charge of management) is also super-critical. In fact, splitting management from governance is the very edifice of good CG practice, which is completely void in Clause 49.

(On a lighter note, we see this role clarity even among the three icons of Hindu religion - Brahma, Vishnu & Mahesh)

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