A take on the Kotak committee report

Suggestions to improve corporate governance at India Inc

A 177-page report on strengthening corporate governance has been presented by a committee chaired by Uday Kotak, Executive vice Chairman and managing director of Kotak Mahindra Bank.

A glance through the report shows that it is more in spirit than in letter. There were altogether seven critical issues set as the initial frame of reference for the study, to the panel. Some of the burning issues in the corporate governance world, amidst the backdrop of developments at Infosys and the Tata group, have reportedly been addressed in the report.

The report is currently in public domain and a one-year window has been set by the regulator, to decide the implementation, which will be around October 2018.

Indian corporate governance has gone through the hands of many committees and evolved over a period of time. One such committee was constituted under the chairmanship of Kumar Mangalam Birla in 1999 with the primary objective of raising the standards of corporate governance.

The report of the committee was the first formal and comprehensive attempt to evolve a code of corporate governance. The recommendations of the report led to the inclusion of special clause 49 in the listing agreement for governance.

The Enron debacle triggered the appointment of the Naresh Chandra committee in 2001. It primarily focused on auditing and appointment of auditors.

Another committee under the leadership of NR Narayanamurthy evolved the concept of the whistle-blower system. Again, for the comprehensive revision of the companies Act 1956, a committee was constituted under the chairmanship of JJ Irani, director, Tata Sons, in 2004.

The Kotak committee report recommends raising the number of Independent directors on the board, from the present three to six members. This highlights the need for more independent directors on the board of companies. The requisite qualification and competencies for an independent director should be evaluated by company board and the power to induct them is the sole responsibility of the board rather than the promoter.

Gender diversity

The report addresses gender diversity by recommending a woman independent director to the board. The resignation of the independent director should not be made by way of mere tendering of the resignation, but a detailed explanation to this effect should be made and the matter is to be reported back to stock exchanges in which the shares of the company are listed with.

These propositions raise many questions in the minds of stakeholders.

Unlike other countries, India’s corporate world is largely controlled by the promoters themselves. Majority of the company’s stake is with them. Shifting their power in exercising decision-making to that of company board will make for a challenging situation.

Also, many family-dominated businesses have already appointed a woman director in order to comply with Company’s Act 2013. So, if a new suggestion is adopted, it may raise the number of women directors on the board to two in order to accommodate the independent woman director.

In the present scenario, independent directors are seen as protectors of minority shareholders and not as representatives of stakeholders as a group.

Recent episodes have shown that the independent director emerges on to the picture only when issues within the company become more controversial and are reported by the media.

There is a need for a code of conduct for independent directors.

The report made another interesting suggestion on segregating the role of CEO and Chairman of the board in line with European model. The present system is more Americanised, where the role of Chairman and CEO is held by the same person, negating the basic foundation of the principles of governance.

Today, the Indian board leaves the responsibility of the management of day-to-day affairs of the company to the management, while the Chairman plays a leadership role by overseeing their activities. There is a need to treat the two roles separately.

Another area is on information sharing through the green channel. Under this, any person seeking information from the company which is materialistic in nature, including shareholder, promoters, can do so only by way of signing an agreement with the company. This may largely contribute to information asymmetry.

Mere agreement will not solve the real issue. The nature, purpose, use of the information all should be logically analysed, especially in the light of insider trading norms set by the regulator and other connected issues.

Information is vital in the knowledge era, and disclosures connected with related party information are well-addressed by this report. The related party transaction thresholds specified by the committee and that it should be shown on half-yearly basis on the website of companies are seen as welcome moves.

Also, the role of auditors is adequately addressed by this report. Full disclosures connected with the auditor’s resignation should be made by the company as per the committee recommendation.

The regulator (SEBI) too can act against auditors of listed companies. Strengthening the hands of auditors is an appreciable suggestion.

Corporate governance extends beyond corporate law.

Its fundamental objective is not mere fulfilment of the requirements of the law but ensuring the commitment of the board in managing the company in a transparent manner to maximise shareholder value.

With the introduction of the Sarbanes-Oxley Act, 2002, corporate governance practices — auditor independence, conflict of interest, financial disclosures, severe penalties for wilful default by managers and auditors in particular — have been altered fundamentally. The Dodd-Frank Wall Street reform and Consumer Protection Act 2010 have given shareholders the opportunity to hold executives of the company they had invested in accountable.

The suggestions made by the committee are equally important to the public sector, which is predominantly controlled by the government.

The writer is Professor, Adishankara Business School, Kaladi, Ernakulam

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