Newsletter Category: 2016

The scourge of insider trading, taking advantage of information asymmetry, has been the bane of the Indian securities market. Responding with a seemingly heavy hand, the market regulator has put in place a stringent framework that is said to border on regulatory overreach. Violating the “need to know” principle even in the absence of a consequent trade, is an offence. Wasn’t the regulation meant to address insider trading? Is the insider at a disproportionate disadvantage? Suresh Talwar and Suresh Senapaty address our information asymmetry.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

Suresh Talwar
Managing Partner at Talwar
Thakore and Associates

Suresh Senapaty
Former Chief Financial Officer,
Wipro

Insider trading is the act of trading, directly or indirectly, in the securities of a publicly listed company by any person, based on certain information, not available to the public at large, that can influence the market price of the securities of such company.

The PIT 2015 casts a restriction on the “insider” from communicating, providing, or allowing access to any unpublished price sensitive information, relating to a company or securities listed or proposed to be listed, to any person including other insiders except where such communication is in furtherance of legitimate purposes, performance of duties or discharge of legal obligations. Clearly, this is a deviation from the PIT 1992 where trading by the person in possession of unpublished price-sensitive information amounted to the contravention of regulations.

The present provision is intended to cast an obligation on all insiders who are essentially persons in possession of unpublished price sensitive information to handle such information with care and to deal with the information with them, when transacting their business strictly on a need-to-know basis.

This near-absolute restriction on sharing of information with others – whether there is any trading in a company’s shares or otherwise, creates many impediments in the operations of group companies.   The question that begs consideration is whether in professionally managed companies, the largest shareholder needs to know anything about the company in which she/it holds shares.  Does a brand owner ‘need to know’ anything about the company which is using its brand? What percentage of shares of the company does the largest shareholder need to hold, before she/it qualifies to receive price-sensitive information from a company?  The unravelling of the Tata-Mistry standoff will raise several of these questions and hopefully provide some answers to avid students of the law.

Progress in human civilization is measured by what people treasure and protect. It was human life at first, which was soon followed by property. In its evolved state, information is prized almost as much as human life and property. Securities market is a good example where access to authentic information is what separates a possible profit from a possible loss.

Corporate insiders are in a unique position to profit as they have constant access to price-sensitive information which is not available to outsiders. Given this situation of inequality, insider trading regulations grew out of the need to attract outside investors to invest in the company. The stronger the insider trading regulations, the higher is the valuation as more investors are attracted. The U. S. market is a good example.

In this crusade to protect value for outsiders, it does happen that the freedom of the insiders to trade in their own stock is restricted.  The principle of ‘abstain or disclose’ and the practice of trading bans prior to quarterly result declaration, owing to the  presumption of insiders having price-sensitive  information,  are two well accepted restrictions. Even these seemingly rigid restrictions on insiders can be addressed with publicised trading plans which permit the insider to execute trades during these restricted periods.

Given the way regulations on insider trading have evolved, it is difficult to say that insiders have a homeground disadvantage, especially as insider trading curbs and restrictions are primarily meant to enhance the value of the company that the insiders have a long-term stake in.

Yezdi H. Malegam
Former Chairman, National Advisory
Committee on Accounting Standards
and Member of Board, RBI

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

Initiating the conversation, Mr. Damodaran asked whether it was necessary to regulate Corporate Governance, when many promoters and companies had, even earlier, delivered value to stakeholders without the intervention of Regulators and in the absence of over-prescriptive regulations.

Responding thereto, Mr. Malegam placed the matter in historical context. He referred to the Cadbury Committee which was set up in UK with the primary objectives of preventing loss of credibility of accountancy bodies and to help London retain its position as a preeminent financial centre. Around the same time, in USA, Mr. Arthur Levitt, then Chairman of Securities and Exchange Commission (SEC), questioned the credibility of financial information put out by companies as also the seemingly unjustified increase in managerial remuneration. The Blue Ribbon Committee was set up to address these concerns. Corporate Governance has evolved because of a change in the profile of shareholders from retail to institutional, professional middle class persons seeking company related information in the context of their investments, the accountability of professional management to owners/promoters and an increase in competition among emerging markets for access to international funds.

Corporates have responded to over-prescriptive regulations by box-ticking exercises which are facilitated by a rules-based regime. A principles-based regime, which is often preferred by Boards and heads of organisations, enables a value –based approach to Corporate Governance whereas a rules-based regime, often preferred by compliance officers, leads to box-ticking exercises. He referred to a survey in UK involving 2000 companies and 500 professionals which identified the characteristics of winning Boards and losing Boards.

Mr. Malegam referred to the Combined Code of UK which laid down the objective of Corporate Governance, focusing on the Board’s oversight role and helping the Board to provide entrepreneurial leadership to the management, setting strategic aims and ensuring that resources, both financial and human, are in place. He stressed the need to factor in the country-specific context, principally deriving from culture.

Responding to a question from Mr. Damodaran regarding the impact of compensation on the independence of a Director, Mr. Malegam mentioned that benchmarking by independent agencies can help in determining fair remuneration. While a good Independent Director (ID) should be compensated for her time and expertise, compensation should not be so excessive as to lead to a conflict of interest. Ultimately, it is for each Director to decide how much is too much.

Intervening in the discussions, Mr. Deepak Parekh, Chairman, HDFC, referred to 4 distinct types of companies in India in the context of their governance. He likened family owned promoter companies to a lion, PSUs to an elephant, MNCs to a horse and private companies to a tiger. Elaborating on this, he mentioned that the lions behave like kings of the jungle and set their own standards which might be low. PSUs, like elephants obey the masters, and IDs have little value, especially since the fear of subsequent questioning leads to a passive role. MNCs like horses follow the directions of the parent company and the standards of governance by and large are good. Private companies, with no dominant shareholder, are like endangered tigers. There is not much of dissent or disagreement because of the old boy’s club.

Responding to a question from Mr. O. P. Bhatt, Former Chairman, SBI, Mr. Malegam mentioned that the recent splitting of the post of CMD in public sector banks should work well if, properly selected Chairpersons can tone down the disproportionate power enjoyed by the Government Nominee Directors. Strengthening the process of appointment and enhancing both autonomy and accountability are important.

Responding to former Home Secretary, Mr. G. K. Pillai’s query regarding the responsibilities of the Board members of the parent company towards the affairs of the subsidiaries of the company, Mr. Malegam touched on the recommendations of the Kumar Mangalam Birla Committee, and referred to the present provision that any material transaction or event has to be disclosed by the Managing Director (MD) of the subsidiary to the parent company Board. The AC of the parent company has an additional responsibility in respect of the financial statements of the subsidiary.

FOOTNOTE – This conversation was one of the sessions in our annual 2 day Corporate Governance Summit, Gatekeepers of Governance, held last year. It was an unstructured and free wheeling conversation with comments and questions from the audience. It sought to deal with the entirety of Corporate Governance, without focusing on any specific aspect thereof.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

Rama Bijapurkar
Thought leader and Management
Consultant

Solutions and their problems

“She who plays the piper calls the tune.” Try saying that to the hapless investor, depositor or similarly placed recipient of a service in the financial sector, who, instead of calling the tune has been led a merry dance in the name of laws, rules and regulations purportedly written in her interest.

Regulatory organizations and regulations exist in order to create a level playing field so that persons suffering from information asymmetry are not disadvantageously placed. However, regulatory hyperactivity seen the world over in recent times, has often caused bewilderment rather than conferred benefits. Nearly every crime or misdemeanor is being responded to in kneejerk fashion with a new regulation. The guiding motto appears to be “regulate in haste, amend at leisure”. The fact that compliance has a cost, and that the tab is picked up by the person in whose name regulations are written, seems to escape the attention it deserves.

To ensure that regulations are pragmatic and are designed to address an existing problem rather than to create a new one, a Committee setup by MCA (Disclosure: I chaired the Committee) recommended that every authority, tasked with the function of writing regulations, should have within it a Regulatory Preview Authority to ensure a considered regulatory response to a perceived need. This will address the “flow” problem of unnecessary regulations, even as the “stock” of existing regulations gets reviewed. The sad truth is that there is no shortage of laws, rules and regulations in this country or anywhere else. What is missing is the ability or willingness to quickly and effectively use these legal and regulatory provisions to bring wrong-doers to book. The need of the hour is less regulations and more regulation. To facilitate business, we should take care not to throw out the baby with the bathwater.

Slow burn, unlevel playing field

There are three criticisms that are frequently levelled at regulators by those that they regulate:

(1) that they go after violations of the medium and small guys on whom they practice their regulatory dharma while turning a blind eye to what the really big fish are doing,

(2) that they are the God of small things, and way too prescriptive about matters relating to the operations of the entities they regulate and

(3) that they are totally enthused with their developmental role and it is here that instead of incentivising conscious capitalism or creating an well designed space for those business models that can serve poorer consumers profitably, they insist on everyone in the  private sector doing their bit of business philanthropy. All these criticisms are valid, and apply in different degrees in different combinations to all regulators, but the first one of not evaluating  everyone with the same yardstick is the one that undermines faith in the regulatory system.

However when viewed over a longer term period, we can see that insistent persistent regulators have positively impacted the discourse in board rooms and with managements, even if it fear driven – causing a slow change for the better in more prudent and more ethical business practices, as well as better governance processes. Behavioural theory psychologists hold that behaviour change if sustained will eventually lead to attitude change. This, in my experience, is already beginning to happen in many places.

Is the cost of regulatory compliance very high? That is actually far less of an issue, as I see it, than the trust in the regulator or the transparency of the regulatory system.

GATEKEEPERS OF GOVERNANCE
A Corporate Governance Summit

The Third annual two day Summit, GATEKEEPERS OF GOVERNANCE, has been planned as a series of sessions which seek to address different aspects of Corporate Governance on the basis of the experience of the last few years. The increasing acceptance of Corporate Governance practices as value enhancers on a sustainable basis has to be advocated and driven by persons who see themselves as change agents on a mission. They are the true Gatekeepers of Governance, in that they facilitate the acceptance and adoption of good practices while keeping out what is undesirable and unproductive. This Summit is a clarion call to the Gatekeepers of Governance to spread the message that good governance is a necessary condition for sustained performance in increasingly competitive times.

Date: 17th – 18th November, 2016Venue: Hotel Trident,

Bandra Kurla Complex, Mumbai

For more information, please visit www.excellenceenablers.com

“Now let it work.
Mischief, thou art afoot.
Take what course thou wilt!”
                                        (Mark Antony in “Julius Caesar”)

Class Action Suits, the new kid on the block in Indian corporate law, best illustrates the saying: “Where you stand depends on where you sit.” Those who are potentially at the receiving end, are seeing the dark clouds of despair. Those who are empowered, see a ray of hope. Will the already endangered species of IDs vanish from Boardrooms as soon as the first suit is filed? Jerry Rao and Sandeep Parekh share their perspectives.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

Jaithirth (Jerry) Rao
Chairman, Value and Budget
Housing Corporation and
Founder and former CEO, MphasiS

Sandeep Parekh
Founder, Finsec Law Advisors

When minority investors get shafted – which is not unusual in modern capital markets, the transaction costs are way too high for someone with just a thousand shares to sue the company or its management. The angry and frustrated shareholder simply sells out, curses her fate and moves on. Class Action Suits, by aggregating the plaintiffs, who individually may be lethargic, but who collectively can make an impact has emerged as a useful way to redress the asymmetries. This way even the small shareholder gets some recompense. More importantly, it keeps indifferent managements on their toes.

So of course all of us should be welcoming Class Action Suits. But tarry a minute. One only wishes it were that simple. These kinds of legal actions work when the judicial system is efficient and reasonably fast. If between endless adjournments and multiple appeals, legal actions result in verdicts after twenty years – mind you in the twenty years, many companies may have disappeared and several managers would have gone on to meet their creator – then it is not clear that the so-called “wronged” and “deserving” small investor is helped. But one thing is for sure-we will now suddenly have a spate of frivolous suits. This is especially so because in our country there are virtually no penalties for vexatious litigation. These frivolous/ vexatious suits will simply drive up the cost of capital even for honest and competent management groups and increase the problems of doing business in India – something that one hopes we want to prevent.

While conceding the principle involved in Class Action Suits, we must wait. Until legal and judicial processes are reformed in a manner that reduces delays and inhibits frivolous lawsuits, it is better to be a frustrated investor and simply sell out, rather than make India even more difficult as a place to do business in. After all, then investors will have nowhere to invest!

After the Satyam fraud, India, as a country, realized that shareholders, of Indian companies, who have faced fraud, could not be made whole. In contrast, the international shareholders could obtain US $125 million by filing a class action suit at a US court. The Irani Committee proposed the inclusion of class action law suits in the then proposed Companies Act.

Section 245 of the Companies Act provides a right to members and depositors to bring an action against the company, its directors, auditors, experts, or consultants, for any fraudulent act or omission committed or likely to be committed by them. This has so far remained a dead letter since we have not yet seen a single class action law suit since 2014. This is primarily because of what economists call the tragedy of the commons. An investor must fight alone bearing the costs of, and delays in, litigation, but the benefits are enjoyed by all investors. In addition, the provision is clumsily drafted, complete with a glaring typo, provides barely any benefit, puts an onus of collecting a sufficient number of investors or depositors, and even has a provision for imposing costs in some cases.

For class actions to be effective, the right place to introduce a beneficial provision is in the Civil Procedure Code and the provisions should have clear benefits, deal with the tragedy of commons, reduce the burden on the litigating investor/depositor and finally, for this to really succeed, there will need to be an introduction of contingent fees payable to lawyers.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

“The moping owl does to the moon complain
Of such, as wand’ring near her secret bower,
Molest her ancient solitary reign.”
(Thomas Gray)

Statutory and regulatory prescriptions consequent on corporate scandals, as well as increasing shareholder activism have together contributed to Boards that are engaging constructively with managements in pursuit of legitimate corporate goals. In the process, Boards are demonstrating an eagerness to shape strategy. Should Boards co-create strategy? Are they equipped to do so? When does intervention become interference? R. C. Bhargava and Vikram Singh Mehta share their perceptions.

R.C. Bhargava
Chairman, Maruti Suzuki
Independent Non-Executive
Director on Boards

Vikram Singh Mehta
Chairman, Brookings India and
Former CEO, Shell India
Independent Non-Executive
Director on Boards

A Company needs to have a long term, as well as a short term strategy to ensure future success and to enable it to better deal with the multitude of risks associated with operating businesses. The Government, and SEBI, have sought to improve corporate governance, and performance, by mandating that a Board must have Independent Directors.

The expectation is that Independent Directors will be people with wide experience, and skills in diverse fields relevant to the management of a business. If the shareholders of a Company ensure this while approving IDs, these IDs can play a very meaningful role in providing inputs for strategy formulation. If the shareholding of a Company is such that one person, or family, is in effective control, the quality of the Independent Directors, as well as their role in strategy formulation, will depend on the intent and attitude of the controlling shareholder.

I believe that all managements, irrespective of their shareholding, would greatly benefit by selecting IDs with a good understanding of business and risks, and involving them in strategy formulation. This would give them a sense of ownership, and thus involvement, in ensuring effective implementation and success of strategies. Unfortunately, this is not happening adequately. Where Boards do get involved in reviewing and monitoring implementation, and this too is infrequent, they are handicapped as they do not know the rationale behind the strategies. The Boards are then largely ineffective as far as strategies are concerned.

Should Boards co create in order to co own strategy”. Fascinating question and one that can be variously interpreted. My answer to this question is “no ” because I interpret it to imply that Boards should get more deeply engaged in the formulation and implementation of strategy and that without such deepening engagement they cannot discharge their fiduciary responsibilities . I do not believe this to be the case . Boards are the highest policy making body of the company and the approving authority for strategy. As such they do need to be involved in the creation of strategy and they cannot disclaim ownership. But Boards have limitations. They do not have the time and the knowledge to do more than provide advice, compel introspection and supervise performance against well marked metrics. Were they to endeavour to deepen their involvement, however laudable the intention,   it could undermine the effectiveness of management to deliver.

The forces of technology, globalisation, demographics and geopolitics have altered the operating context. Management must now heed the possibility of a non linear future. They must develop strategies that offer robust responses to the counter factual “what if”. Towards this end, Boards should help management navigate the shoals of uncertainty and stay on the right strategic track. They should ask the right questions, challenge conventional wisdom and share information and experience.  And in so doing, they should at all times ensure they do not cross the line that divides involvement from interference. The role of the Chairman is crucial in this regard.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

“The votes were cast, ere the speeches were made
No questions were answered, no fears allayed.”
(M. Damodaran)

It is AGM season again. It is that time of the year, when shareholders make their way to their annual meetings with the men and women of substance, who manage and direct the companies, that they partly own. More often than not, theirs are journeys not of expectation but of hope. Managements sometimes see these as confrontational rather than collaborative interactions. Stakeholder democracy is premised, among other things, on meaningful AGMs. Subodh Bhargava and Shailesh Haribhakti offer their take on value-adding practices and possibilities.

“If hopes were dupes, fears may be liars.”

Subodh Bhargava
Chairman,
Tata Communications and Independent
Non-Executive Director on Boards

Shailesh Haribhakti
Group Chairman,
DH Consultants and Independent
Non-Executive Director on Boards

A ‘meaningful’ AGM for shareholders should enable them to get detailed information in respect of the business of the company – products, operations, processes, talent,  market, competition, financials, values, strategies, technology, and future direction and also share their assessment on these aspects and the company.

For the Board and the management, the AGM would be ‘meaningful’ if the shareholders give constructive feedback, and suggestions about the status and performance of the company. When the interaction results in reinforcing shareholders’ confidence and trust in the Company / Management and its strategy, sustained growth and handsome returns will be ensured.

Presently, the transparency and the granularity of information falls short of shareholder expectations. Often, shareholder interventions tend to be trivial such as time, date and venue of the meeting, possible handouts, and delayed receipt or non receipt of the report.

The following could make AGMs meaningful:

• Annual Report including the accounts to be presented in a reader friendly manner with transparent and comprehensive disclosures.
• Shareholders need to be persuaded to accept soft copies.
• Management should make crisp and informative presentation about the company in an interactive manner.
• To maximize participation, the time allotted for each shareholder intervention must be strictly observed.
• To avoid repetition, only shareholders who are present at the commencement of the meeting should be permitted to speak.

AGMs are annual occasions for shareholders to meet the Chairman and Board members to discuss the year gone by and to take home some thoughts about future prospects. Most Companies treat this opportunity as a ritual to be completed as soon as possible. The salutary intention of increasing shareholder participation has caused AGMs to become even more ritualistic as shareholders know that all decisions are already voted on and their speeches are an empty formality. Can this be transformed? Emphatically, yes. The AGMs of two Groups reinforce this belief.

The Chief Promoter of one Group himself makes a presentation on the past and the future of the business. Extraordinary effort goes into making this presentation a collector’s item. New concepts, strategic choices and the emerging challenges are shared and a vibrant Q&A session ensues. Clarifications are given and the shareholders experience a sense of fulfillment. Shareholders may speak at length but are requested to avoid repetition. This is a model worth following.

In another company, the Executive Chairman makes a statement which is both a comprehensive review of the year past and a peep into the future. Running videos and audio presentations enhance shareholder interest. Recognizing shareholders by name and a sentence or two of conversation create a lasting bond.

Forward looking statements that may bind future Boards should be avoided. The key elements to make AGMs more meaningful are valuable insights outside the Financial Report, a human touch which creates a relationship and a belief that every shareholder matters.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

“For him light labour spread her wholesome store;
Just gave what life required, but gave no more.”

(Oliver Goldsmith)

How much, and in what manner, should Independent Directors (IDs) be compensated, is a question that continues to occupy corporate mindspace. Pay too little and you end up with Directors who are willing but not able. Pay too much and you possibly impact independence adversely. Stock options allegedly promote short-termism. On the other hand, some investors perceive disinterest or non-involvement on the part of Directors who do not own shares. Loss-making companies cannot pay commission to IDs, and hence find it difficult to get the good IDs, that they need. Is there a mismatch between the statutory expectations from IDs and their compensation?

Deepak Satwalekar and Somasekhar Sundaresan shed light on the vexed question, “How much is too much?”

Deepak Satwalekar
Independent Non-Executive
Director on Boards

Somasekhar Sundaresan
Partner,
J. Sagar Associates

With the largely critical discussions on the Companies Act, 2013, it would seem that, earlier, IDs did not have any responsibilities. Saying that the workload of IDs has increased significantly is insulting those who earlier took their role seriously. The change now is that more onerous and specific responsibilities have been cast on IDs, requiring greater engagement. Possible liabilities faced by them too have changed.

What is appropriate (not adequate) compensation for IDs? At what level would independence get compromised? How can compensation of IDs help align their interests to those they represent?

With a higher time commitment, risk taking ability and shorter tenures, the number of potential IDs has shrunk. However, the basic law of Economics which requires price to adjust when supply shrinks and demand increases has been negated by legal stipulations.

The developed world is moving away from “per meeting” compensation. A crude indicator would be based on the expected role of IDs. Directors on Committees, depending on their workloads, should be paid additionally. Evaluation can address issues of non-attendance and non-participation, but should not lead to differentiated compensation.

Listed companies should pay a part of IDs’ compensation with stocks bought at the prevailing market price on the day the compensation is paid. However, these shares should be permitted to be sold only after ninety days (or more) of the exit of the Director from the Board. This will prevent short termism and insider trading concerns.

It is time that the views of IDs on this subject are heard, by those that matter.

When the role of directors in the governance by the board develops into a fundamental tool of regulatory policy, what directors‎ should be paid becomes a key question.

Directors  are humans whose risk-reward appreciation is the same as any other normal human. The increasing regulatory focus on making the buck stop at the doorstep of the directors is a good thing. It has made directors think about what makes it worth their while  to join a board. Equally, it reminds the system that paying peanuts would fetch only monkeys.

Directors cannot be expected to be on business corporate boards for altru istic purposes. Yet, when the payments from a company inflate their earnings unreasonably it begs the question if their judgement would remain uninfluenced by a largesse – particularly for independent directors. Sitting fees, regulated by law, are a pittance. Stock options pose a moral hazard – independence from ownership mingling with promoting value of ownership does jar with each other. Commissions by percentage can bloat the remuneration.

Simple ways to see how much is too much:

* proportion of remuneration paid to a director in her total income

* time and attention on hand for the director to seriously attend to meetings

* assessment of contribution to the board

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

The question “Whose purpose do quarterly accounts serve?” is beginning to get increasingly asked in corporate circles. It is well recognised that a quarter as an accounting unit breeds short termism. Taken together with guidance provided by managements, and the expectations of the street (read analysts), this sometimes leads to financial engineering such as postponing bad news and artificially phasing in revenue to show continuing improvement in performance. Countries such as UK, Australia and South Africa have lived with half-yearly financial statements, and are none the worse for it. It is clearly established that there is no correlation between a lesser frequency in financial statements and the occurrence of corporate frauds. Is the rendering of quarterly financial statements, premised on the need for reducing information asymmetry, a solution worse than the problem? In the process, does compliance tend to pre-empt significant management bandwidth at the expense of business? Y.M. Deosthalee and Ashish Chauhan offer their take on the subject.

Y.M. Deosthalee
Chairman
L&T Finance
Holdings

Ashish Chauhan
MD & CEO
Bombay
Stock Exchange

Over the past few decades, increasing shareholder activism has forced market regulators around the world to enforce more frequent financial reporting for listed companies; the primary rationale being the need to eliminate information asymmetry between retail and institutional shareholders.

The resulting information overload has led to increased volatility in global stock markets as investors constantly react to fresh data. The pressure on quarterly results often leads to postponement of recognition of adverse effects in the hope that the situation would be rectified in succeeding quarters. This leads to accumulation of bad news in a particular quarter leading to wild fluctuations in stock prices.
Companies are also under constant pressure to meet quarterly expectations of analysts which forces them to focus on short-term objectives instead of executing long-term strategies.

Mandating quarterly declaration also results in the unintended consequence of companies’ Finance & Accounts teams spending more time in reporting and interacting with auditors at the expense of other functions.

While in theory the increased frequency of financial reporting should result in elimination of accounting fraud; in practice, international examples like Enron and WorldCom, both of whom used to declare quarterly results, demonstrate the limitations of this approach.

The London Stock Exchange (LSE) has made quarterly financial reports optional since 2014 and there are calls for similar changes in the US-SEC. Perhaps it is time for Indian regulators to also look beyond quarterly reporting and instead focus on continuous disclosure as a tool for reducing information asymmetry between various classes of investors.

Joint stock companies and double-entry book keeping system, in my opinion, are amongst the most important social innovations the world has witnessed in last millennium. Together, they have helped the world progress materially and allowed people to share their capital for committing to future.

Joint stock companies, constituted as early as 13th century, with double-entry book keeping in 1494 paved the way for incorporation of limited liability entities, the East India Company in 1600 being one famous example.

There has always been an asymmetry of information between “Insiders” whom we know as promoters or managers; and other shareholders whom we will call “Outsiders” in this article. Outsiders are legitimate owners but have much less information available to them. Over time, regulations and pressure from Outsiders, periodicity as well as the quality of the disclosures has increased. Quarterly results and other disclosure requirements as well as the use of technology have helped the corporates to reduce the asymmetry of information to some extent. We have come a long way in reducing malpractices of insiders over last two decades in India and abroad.

I will not be surprised, if some tech savvy companies start giving monthly, weekly, daily or real time disclosures on the operations of the company to provide comfort to the outsiders to show them that the system is not loaded against them. Of course, as the CEO of the largest stock exchange in the world by number of listed companies, I would be delighted if an Indian company decides to do this and lead the world in corporate governance.

M. Damodaran
Chairperson, Excellence Enablers
Former Chairman, SEBI, UTI and IDBI

With the disquieting number and variety of corporate scandals having shaken the trust of ordinary men and women in the institution of the joint stock company as a vehicle of economic growth, lawmakers and regulators have sought to put in place structural and systemic solutions. The emergence of the institution of the Independent Director, as an instrumentality to promote sounds Corporate Governance, has been a signifi cant consequence.

When the concept of Independent Directors originally surfaced the predictable response of promoters and management was to seek persons with whom they had a high comfort level. The Independent Directors saw their role as largely confi ned to making up the number to address the arithmetic of Board composition.

With the extraordinary range of responsibilities heaped on them by law and regulations, Independent Directors have realised that there is a price to pay for passive presence. Regulatory interventions are becoming more in-depth, intrusive and inquisitive. From sleeping (and occasionally snoring) in boardrooms, they have to sit up and take notice and stand up for principles. In the process, are they empowered or endangered? Nawshir H. Mirza and Zia Mody provide their insights.

Nawshir H. Mirza
Independent Non-Executive
Director on Boards

Zia Mody
Managing Partner,
AZB & Partners

Independent directors are in the fortuitous situation of being equidistance from all stakeholders. They are, therefore, the best constituent of a board to champion the interests of those stakeholders who are not represented around the boardroom table. They are expected by law to be the voice of the silent majority who are affected by their company’s activities. This is a tremendous responsibility but it also provides them with tremendous power: Not merely to protect minority shareholder interests, but also the interests of the community, future generations, the environment, vendors – stakeholders whose interests are often overlooked in the blinkered pursuit of shareholder value. Few have yet applied their minds to how they can discharge this responsibility, most continuing in the old strain of “adding value” of the traditional kind – increased profi ts. Most independent directors assume a passive role, one in which they react to ideas conceived of by the controlling shareholder or his appointed management. So, whilst society’s expectations, as captured in the law, are of independent directors who act as defenders of stakeholder interests actively, most of them are unaware that times have changed very rapidly.

Herein lies the danger to their continued existence. Companies are made the villains for many social ills, from obesity to climate change, and the chorus for reigning in at least the more egregious of their activities rises louder. The only organism inside companies to prevent such behaviour is the independent director. They act or they go.

The peace of mind of an independent director is today a rare commodity. She is charged with being the moral gateway for the benefi t of public stakeholders. Independent directors wear different hats, often sitting together uneasily. Mindful of the many regulators that, in hindsight, call into question their actions, they often overdeliberate the many decisions taken in good faith at a given point of time. These could well be viewed quite differently later by regulators keen to demonstrate their anxiety to serve the public interest. No longer is it enough for directors to be not present at a particular meeting to absolve themselves from having not participated in the decisions. They have to stand up and say no and object once they get the minutes and read them. So what are they really supposed to do? Upset the decisions which would have been deliberated and thought through when they were not present and put decision-making in fl ux simply because there is nervousness about their being questioned about what they did, years after the decision was taken. Is there an anxiety about drawing comfort from and accepting the integrity of collective decision making and moving on? Do Independent Directors have to concentrate on the ‘cover their tracks’ agenda more than ‘grow the company’ agenda?

These obvious worries apart, the good news is that the independent director today is clearly more empowered. He has a clear role to play. He can change the course of board management in the best possible way. Governance then becomes far more meaningful and not mere lip service.

More empowered? Yes.

More endangered? Possibly.