Sebi's reforms of corporate governance

Sebi has announced some new norms for corporate governance. These were overdue. In some cases, the proposals goes beyond the Companies Act, 2013- and rightly so.

First, Sebi limits independent directors to two terms of five years each. This is the same as in the Companies Act, 2013 except that the Companies Act made the provision prospective. Sebi proposes to include time spent already. If you have served for five years or more already, you can spend only another five years. I believe companies must respect the spirit of the provision and ask people who have spent more than 10 years as independent directors to step down forthwith.

Secondly, Sebi has imposed a limit of 7 independent directorships, compared to the limit of 10 in the Companies Act. I personally think the limit should have been five at least for companies above a certain size.

Thirdly, in line with the Companies Act 2013, boards will have to constitute Remuneration and Nomination Committees, both headed by independent directors.

Fourthly, again in line with the Companies Act 2013, it mandates evaluation of independent directors' performance, separate meeting of independent directors, and compulsory whistle-blowing mechanism and prohibits grant of stock options to independent directors. Sebi needs to spell out how it expects the evaluation of independent directors to be done- and whether this evaluation will be shared with Sebi and the shareholders.

I am curious to know what it means by "enhanced disclosure of remuneration policies". The big lacuna today is that we do not know the basis on which the board awarded performance incentives. Very often, even the board is kept in the dark about these. Sebi must ask companies to spell out the norms on which the CEO and other top executives are given incentive pay.

PS: The Companies Act allows independent directors, who have completed ten years, to come back after a "cooling off' period of three years. In my view, this is undesirable. Sebi needs to address this issue through Clause 49. Once you have been with a board for 10 years, you should part forever- and  this should include years served before the present amendments to Clause 49.

Big B-Schools' mega investments

Industry hiring is poor and applications to B-schools are falling, including in India. You would have thought B-schools would be cutting back on spending. Not the big ones, it seems, going by a story in the Economist:

Scholars sipping a glass of red in the posh rooftop bar of Oxford’s Saïd Business School could be forgiven for thinking they had wandered into the nearby Randolph Hotel by mistake. Stanford students can view an impressive modern-art collection housed in its own museum. Harvard Business School MBAs can book a masseuse to relieve the stress of a hard day slaving over case studies......On January 9th Yale’s School of Management formally opened its swanky new home, designed by Foster + Partners, Norman Foster’s architecture practice. The Kellogg School of Management in Illinois will soon start work on a new headquarters (see artist’s impression, above) for its MBA programme on the shores of Lake Michigan, at a cost of $200m. Stanford’s business school spent $345m on its new campus, largely thanks to the largesse of Phil Knight, the founder of Nike.

The biggest project, at least in terms of cost, is under way in New York. Columbia Business School is within touching distance of raising the $600m it needs to complete a new campus in West Harlem. From Cambridge, MA, to Cambridge, UK, an arms race is under way to provide MBAs with the plushest place to study.

How does one explain these huge investments at a time when the market is uncertain or shrinking and it appears that online education could pose something of a threat? One, as the article points out, B-schools investments are largely funded by alumni and other donations, so it's not as if it has to be repaid from future revenues.  Two, online education may not threaten the top schools. On the contrary, it is the mid-level and smaller schools that could face a threat as they may not offer quality that is clearly distinguishable from online education. Those in the top league will try to outsell each and market themselves to students by staying one jump ahead in infrastructure.

These are plausible reasons. Still, the economics of such investing appears fuzzy given the trend towards rising fees in the top schools and the number of years it takes to repay loans. At least to some extent, the big investments that B-schools are making will translate into higher fees, making the choice for students- even bright students- more difficult.

Peter Drucker once wrote that the big universities of today would become extinct because their cost structures could not be sustained. If the B-schools succeed in the investments they are making, he would have been proved wrong at least in respect of them.

Global crisis: thinking out of the box

The world appears to be suffering from 'crisis fatigue'. There's been so much talk over the past seven years and so little by way of results that policy-makers seem to have given up. Top economists, gathered in Philadelphia recently, proposed a clutch of stronger measures than austerity or monetary loosening, the Economist reports: 

Ms Reinhart and Mr Rogoff suggest debt write-downs and “financial repression”, meaning the use of a combination of moderate inflation and constraints on the flow of capital to reduce debt burdens…….

The Harvard professors were not the only economists who argued in Philadelphia that desperate times may call for desperate measures. Olivier Blanchard, chief economist at the International Monetary Fund, among others, mooted inflation as a means to provide monetary stimulus when interest rates are stuck near zero. Hans-Werner Sinn of the University of Munich reckoned that since Germans will not consent to the use of higher inflation to ease European rebalancing, several euro-area economies need to leave the single currency, at least temporarily. And Larry Summers of Harvard University acknowledged that higher inflation might propel the American economy out of “secular stagnation”, but suggested that an ambitious five-year programme of public investment would be better.

In short, a huge U-turn was in evidence amid the snow of Philadelphia. Before the crisis the talk among macroeconomists was all about the Great Moderation and the primacy of keeping inflation low. Now it is all about the Great Recession—and the possibility that a bit more inflation might just help.

The easy route to crorepati status: independent director

We have a need breed of crorepatis in India: the members of the club of independent directors, Business Standard reports.

This club currently boasts of 15 members, including one ex-academic (Omkar Goswami), one retired bureaucrat (Vijay Kelkar) and several retired and present corporate executives. Goswami, the ex-academic, appears to top the list: he takes in a cool Rs 2.8 crore from his directorships. I am sure he must be the envy of the academic community.

What does it take to get into this club? Well, if you are a big name and have good connections in government or the corporate world, it certainly helps. Such people tend to belong to a closed club from which independent directors are chosen. You will not find a retired CGM of RBI or SBI, a college principleof repute or even several academics of stature in this club. The issue is not the ability to contribute in the board-room by enhancing the quality of discussions. The issue is your willingness to go along with management and your ability to contribute outside the board-room by, as they say, putting in a word where it matters.

One issue, which I have flagged repeatedly, is whether people who are paid enormous sums by the very people who bring them on board can be expected to act independently at all. Who would walk away from a fee plus commission of Rs one crore in order to speak his or her mind on the board? The issue is not just the amount that is paid. The issue is who does the selection. Management or the owner alone must not be allowed to select independent directors. Other stakeholders: minority and institutional shareholders and employees, for instance should be able to nominate independent directors. Then, the amount paid is not a problem.

Academic research is still US-centric

It used to be said that there is not much research in the top journals (which are mostly American) coming out of Asia, including India, because those journals still focus on issues related to the US. Well, that remains the case today, the Economist reports:

....a sample of 76,000 papers published between 1985 and 2005 shows that econo-nerds are infatuated with the “land of the free”.

There were more papers focused on the United States than on Europe, Asia, Latin America, the Middle East and Africa combined (see chart). And for the world’s top-five economics journals—where publication of a paper can push a young researcher towards a full professorship—the imbalance is yet more marked. Even accounting for the fact that lots of economic research (and often the best) comes from American universities, the bias persists.

 

The world’s poorest countries are effectively ignored by the profession. From 1985 to 2005 Burundi was the subject of just four papers. The American Economic Review, the holy grail for many academics, published one paper on India, by some measures the world’s third-largest economy, every two years.

Indian academics are asked to increase research quality as judged by publications in the top journals. This may not be much of a problem in the pure sciences and engineering where problems may not be location-specific. In the social sciences, including management, however, it does pose problems.

It is not just that the problem has to be US-related. There are tremendous advantages to being located in the US, advantages related to networking as well as to having the benefit of feedback on working papers in the US seminar circuit. Researchers based elsewhere are undoubtedly disadvantaged.

How do we reconcile the need for quality research with the disadvantages faced by researchers outside the US? One way would be for Asian schools to produce their own journals. These journals would take a long time, however, in catching up with international rankings. Besides, individual schools setting up their own journals does not work; we need a set of institutions to pool their resources to bring out a journal, say, the IIMs indeed getting together for such an initiative. (The HRD ministry has been pushing the IIMs to bring out such a management journal but without luck).


These journals must have the benefit of access to top quality refereeing so that it is accepted- at least within the Asian region- that a paper published in such journals passes the test of quality. It's a tall order. Unless the effort is made, however, in nurturing top journals outside the US, it will be hard to reconcile the need for quality output with the issue of getting US journals interested in non-US issues.