The UK Corporate Governance Code 2018 consists of an updated set of principles that emphasize the value of good Corporate Governance, that listed companies can follow, for the long-term sustainable success of the company. These inter alia relate to Board composition, remuneration, shareholder relation, accountability, and audit. The Code is not a rigid set of rules but offers flexibility through laying down principles, and following a ‘comply or explain’ approach.
These principles would help promote Corporate Governance, and India could consider adopting similar provisions. Some of the principles that India can consider are –
- Diversity – Board should promote diversity based on gender, social and ethnic backgrounds, since the diversity of thought and opinion can help in addressing the same issue in different ways, through healthy debate.
- Responsibilities of the Chair and the Board – The responsibilities of the Chair and the Board should be set out in writing, and be made publicly available, to ensure role clarity.
- Shortlisting of new Directors – An external search consultancy should generally be consulted for the appointment of the Chair and Non-Executive Directors, since it would be able to evaluate Directors independently, without the interference or influence of the Board.
- Time commitment of new Directors – When making new appointments, the Board should take into account existing demands on the new Directors’ time, including significant commitments of the Director, along with the time involved. These should be disclosed to the Board to enable it to decide whether the new Director would be able to commit sufficient quality time to the company.
- Engagement of Chair with shareholders – In addition to general meetings, the Chair of the Board should regularly engage with shareholders to understand their views on governance and the performance of the company, as well as on other significant matters relating to the company. This will help the Chair understand their point of view on how the company is performing. The shareholders may also share their apprehensions with respect to the risks that the company is likely to face. This will enable the Chair to address the legitimate fears of shareholders, and know their views on matters that are significant to the company.
- Engagement of Board with shareholders and other stakeholders – The Board could undertake engagement with shareholders, via methods such as shareholder roundtables or webinars. A disclosure with respect to the method of engagement, and outcome of such engagement can be included in the Annual Report. This will result in boosting the confidence of shareholders, and other stakeholders. The Board should also engage with the workforce. This can be either by appointing a Director from the workforce or by having a formal workforce advisory panel or a designated Non-Executive Director, looking at matters relating to the workforce. This would help in the workforce being represented at the Board level, and their concerns being addressed appropriately.
- Recommendations of the Board – If 20% or more of the votes that have been cast on a resolution are against any Board recommendation, the company should explain, while announcing voting results, what action it intends to take to consult shareholders, in order to understand the reasons behind the adverse result. An update on the views received from the shareholders, and the actions taken, should be published, not later than six months after the shareholders meeting. Having a definite timeline would further assure the shareholders that their views have been acknowledged, and their concerns are being addressed.
- Risk Assessment – The Board should carry out a robust assessment of the company’s emerging and principal risks, and also report in the Annual Report that it has completed a risk assessment of the company. It should also describe how opportunities and risks relating to the future success of the business have been considered and addressed. This would enable the shareholders to know that the company has examined long term opportunities and risks, and has accordingly set its goals and objectives. Undertaking assessment of the company’s emerging and principal risks would allow the Board to anticipate risks well in advance, and enable them to chalk out strategies to mitigate the risks. Reporting the aforesaid risk assessment in the Annual Report would enhance transparency with shareholders.
- Compensation to Directors – The level of remuneration of the Chair and all the Non-Executive Directors should reflect the time contributed by the Director towards the company, and his/her responsibilities, and a Director contributing more time should be compensated accordingly, along with other perks and benefits. The Remuneration Committee should ensure that the compensation plan does not reward poor performance. The Board too should not equalise compensation for all the Directors. A Director who participates actively should be compensated accordingly. This would motivate the Director to perform better in the future. Further, no Director should be involved in deciding his/her own remuneration, and all the arrangements should be transparent and follow set procedures. This would help avoid any conflict of interest, real or perceived.
- Tenure of Chair of Nomination Committee – The Chair of the Nomination Committee should not hold the post beyond nine years from the date of his/her first appointment to the Board. This will help in facilitating effective succession planning. (In the Indian context, while the principle can be adopted, a tenure of 9 years would be high and so should be revisited).
- Chair of Remuneration Committee – Before appointment as Chair of the Remuneration Committee, the appointee should have served on the committee for at least 12 months. This would make him/her well aware of the functioning of the committee, remuneration policies of the company and also the performance of the Directors.
- Concerns, if any, of outgoing Director – A Non-Executive Director, on his/her resignation, should provide a written statement to the Chair regarding his/her concerns, if any, relating to the operations of the Board, and/or the management of the company. The same should be circulated to the Board. Concerns, if any, should be recorded in the minutes. This will also help the outgoing Director to safeguard himself/herself from any future adverse action, since it will serve as proof that he/she had cautioned the Board regarding instances of wrongdoings or suspicious activities, if any, at the company.
The UK Corporate Governance Code believes that government should not merely be a ‘tick-box item’. Each company should be able to explain its actions. Also, communication with shareholders should be proactive, and not an obligation. India can consider having principles informing its rules, with a ‘comply or explain’ provision for some of the provisions. Each company is different, and the same set of rules, may not apply equally to every company. It would also not be cost-effective. A rigid rules-based approach is unlikely to promote Corporate Governance in companies that wish to focus only on compliance.