Newsletter Category: 2017

Setting the tone for 2 days of deliberations, Mr. Azim Premji in his Keynote address highlighted the fact that good corporates do not wait for rules and regulations in order to put in place sound governance policies and practices. He identified four important pillars, namely, principles, transparency, integrity and responsibility for an entrepreneur to run a sustainable business that caters to the interest of all stakeholders. Advising young entrepreneurs to use the moral compass when confronted with tough choices, he emphasized that if anyone compromised on her principles, repetition was inevitable. Mr. Ramesh Abhishek in his Keynote address indicated that a number of foreign entities coming in through the FDI route wanted to tie up with local enterprises and their universe of choice will ordinarily be limited to enterprises with good standards of Corporate Governance. In his address, Mr. Ajay Tyagi, Chairman, SEBI, referred to the fact that well governed companies command a premium in the market place. He spoke of three regulatory principles, namely, balanced Board representation (with shareholder directors, management directors and independent directors), balancing profits with public interest, and an effective enforcement mechanism. In conclusion he mentioned that it was necessary to think out of the box to put in place a relevant regime for Corporate Governance. Left unsaid was the inevitable conclusion that governance would have to move from ticking boxes to complying with principles that factor in the interest of all stakeholders.

In the context of a seeming explosion on the regulatory front, the Summit addressed the question of regulatory impact assessment. The right architecture, the right objectives, the right regulations, and the recognition of ground realities were identified as the cornerstones of a good regulatory framework. It was noted that regulations focus more on the protective role rather than the productive role of Directors. The fiduciary responsibility of the Board towards all stakeholders was highlighted. There seemed to be an anomaly in that companies are supposed to be the democracy of the majority while regulations attempted to protect the minority interests. The regulator’s dilemma was whether to write out specific regulations and be accused of being overly prescriptive, or to lay down only the principles and be accused of leaving too much for interpretation. The problem of smaller companies having to comply with the same regulations as the larger companies was stressed. It was felt that systemically important institutions should be subjected to a higher level of regulation, leaving smaller companies to bear a lesser regulatory burden. However detailed the regulations are, they cannot prevent corporate failure, and even in the case of corporate fraud, the action, more often than not, is corrective and not preventive. The need for quick and effective enforcement action by the regulators was highlighted.

Discussions on the rationale, if any, for different Corporate Governance standards in PSUs brought up some stark realities. Should social objectives lead to lesser valuations? Was the possibility of second guessing by statutory authorities and investigative agencies leading to paralysis in decision making? Was the unwillingness of the majority shareholder to distinguish between ownership and management the mother problem?  Were the CEOs that did not resist extraneous pressure, being pushed around more?

Is all of the blame for Corporate Governance failures to be laid at the promoters doorsteps? Interesting insights such as usurious tax rates encouraging dishonesty and the perception that profit making was bad, if not downright illegal, were forcefully articulated. The fact that profitability and good governance can go hand in hand found emphatic endorsement. The increasing disconnect between stakeholders and management was noticed with concern. Whether the business put employees first or customers first, it needed to heed their voice. Even differences within the organization become power plays rather than exercises in communication, with objectivity sacrificed along the way.

Is all of the blame for Corporate Governance failures to be laid at the promoters doorsteps? Interesting insights such as usurious tax rates encouraging dishonesty and the perception that profit making was bad, if not downright illegal, were forcefully articulated. The fact that profitability and good governance can go hand in hand found emphatic endorsement. The increasing disconnect between stakeholders and management was noticed with concern. Whether the business put employees first or customers first, it needed to heed their voice. Even differences within the organization become power plays rather than exercises in communication, with objectivity sacrificed along the way.

On day 2, the enlightened audience got to hear firsthand from Mr. Uday Kotak, why the Kotak Committee did what it did. Responding to observations that the recommendations constituted incrementalism and did not travel far enough, Mr. Kotak said that the Committee’s approach was evolutionary and its attempt was to get a buy-in from all the 25 members drawn from different interest groups. Even then, two Ministries of Government of India, in separate letters. chose to express serious reservations on grounds of jurisdiction, cost and the like. On PSU governance, he was of the view that a Holdco structure, which would distance Government, might be preferable from a governance perspective.

Given recent skirmishes in the corporate arena, with Boards unable to hold their own, a question that needed to be addressed was “ Do Boards matter?” While the broad distinction between Boards that performed and those that did not was noted, the question arose whether Boards that started out as collegial and cohesive, became collusive with the passage of time. In a young country, with fast changes ushered by technology, was outdated knowledge in boardrooms being passed off as wisdom? The role of the Chairperson is ensuring that Boards measured up to expectations was not lost sight of.

Given recent skirmishes in the corporate arena, with Boards unable to hold their own, a question that needed to be addressed was “ Do Boards matter?” While the broad distinction between Boards that performed and those that did not was noted, the question arose whether Boards that started out as collegial and cohesive, became collusive with the passage of time. In a young country, with fast changes ushered by technology, was outdated knowledge in boardrooms being passed off as wisdom? The role of the Chairperson is ensuring that Boards measured up to expectations was not lost sight of.

What has majorly distinguished Gatekeepers of Governance from other interactions on Corporate Governance is the quality of the audience. The Fourth edition held this November saw animated discussions with an enlightened audience pitching in. They came, they engaged and they concurred (mostly!).

 

For more information, please visit: www.excellenceenablers.com

 

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

The last few months have witnessed the coming to surface of a number of Corporate Governance issues that had remained latent so far. The manner in which such issues get addressed is likely to significantly impact Corporate Governance standards in India.

The protagonists have been many and varied. From founders who seem reluctant to let go and Independent Directors (IDs) some of whom seemed happy to crawl when they were perhaps required to bend, to commentators who chose to give individuals rather than issues relative importance in their analysis, nearly every stakeholder group seems to be staking its claim for a place in the Sun. There have been many firsts, including the attempt made by a number of small shareholders to seek the inclusion of one of their representatives on the Board of Directors of a company. Presumptions of the highest standards of Corporate Governance being practiced have been exposed in a few cases. Briefly stated, students of Corporate Governance can no longer complain that everything is done and dusted and that there are no new issues to analyse or explore.

It is in this background that our 4th annual 2 day Corporate Governance Summit, Gatekeepers of Governance 2017, takes place on 9-10 November, 2017 in Mumbai. The preceding three Summits have seen a number of experts grapple with theoretical issues and concepts while drawing on their rich practical experience. The flavour of the 4th annual Summit is expected to be significantly influenced by the disquieting developments in the Corporate Governance scene over the last few months.

The Summit – Gatekeepers of Governance 2017 – like the three preceding annual Summits, will bring together persons, whose expertise and experience, along with their ability to articulate alternatives with clarity and conviction, will help to shed light on seemingly complex issues.

A recurring complaint has been that regulations have been excessive and not well thought through, while enforcement remains lax and lethargic. The need for meaningful regulatory impact assessment has been talked about for long and this Summit will focus on the need to walk the talk. Promoters have often complained that they are looked at with suspicion in the context of Corporate Governance practices and are perhaps recipients of more blame than can be legitimately placed at their doorstep. The contours of stakeholder engagement need to be revisited to ensure that no category of stakeholder is shortchanged by the Board/management of the company.

No Summit on Corporate Governance can be complete without discussions on one timeless topic – the independence of Independent Directors. Is an ID fact or fiction?

The Summit takes place immediately after the SEBI appointed Kotak Committee on Corporate Governance makes available its recommendations. This is perhaps the best time to raise the question whether there should be a comprehensive revision of existing regulations to make them in sync with desirable business practices and the specifics of the Indian situation. How should the system seize this opportunity to put in place a regulatory regime that is simple and value adding?

Strong managements have often made Boards of Directors look like the fifth wheel of the coach. In some cases, Boards have shied away from discharging their legitimate responsibilities of superintendence, direction and control. The question is beginning to get asked – Do Boards matter?

The combination of provocative propositions and persuasive panelists is a heady cocktail that no serious student of Corporate Governance should pass up. The proposition that checklist compliance is not to be confused with a Corporate Governance philosophy that seeks to reward all stakeholders is expected to inform and influence the discussions and debates over the 2 days of the Summit. The cut, thrust and parry of enlightening encounters is round the corner.

 

For more information, please visit www.excellenceenablers.com

The interface between family and business in India is the stuff of folklore. Books, and to a lesser extent, movies, have sought to capture the frictions, fissures and failures that dot corporate history. At the same time, some business families have put in place sound structures that recognise and respect the roles of family and business, leading to a harmonious and a mutually rewarding relationship. Sanjeev Aga and PM Kumar shed light on this timeless topic.

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

Sanjeev Aga
Independent Non-Executive Director on Boards
and Former Managing Director, Idea Cellular

P M Kumar
Former Business Chairman and Board
Member, GMR Group

The family impulse is hard wired from our hunter-gatherer yesteryears, and is a key business driver. But, a corporate is founded on the impersonal principle that an equity share is an equity share, and the corporation is distinct from its shareholders. This dialectic between “family” and “governance” determines outcomes; like Longfellow’s little girl with a little curl “.. when she was good she was very, very good; but when she was bad she was horrid”.

Most businesses see the light of day because some entrepreneur once played owner manager. Family members expand capital and management bandwidth. Businesses, as they grow, may bring in non-family shareholders, lenders, and managers. But the family retains a headstart in knowledge and relationships.

The late CH Choksey likened the paint company mascot Gattu as his son, his legacy!

Despite tailwinds, family businesses live shorter lives! Because not every family successfully scales. There is the psychological dimension, to shed the maalik naukar hangup if there was one. The managerial dimension, to size up unemotionally the management needs of the business and then to provide them. The integrity dimension, nothing corrodes the soul of a corporate more than poor integrity. And the family feud dimension; divergent goals, divergent calibre, what have you!

Directors may want to ponder on, before their company steps on a land-mine.

Refreshingly, past learnings are not lost. Far-thinking family businesses are constituting family board equivalents with structures defining roles, goals, participation, voting, supervision, earnings, management and succession planning. A smart way to eat your cake and have it too!

Family owned businesses have outperformed their non-family counterparts across several business parameters. Their strengths include commitment, knowledge, continuity, reliability, pride and entrepreneurial drive. However, many family owned companies have a short lifespan and 95% do not survive third generation ownership.

Poor governance, leading to premature mortality, arises from:

1. Complexity: Adding family issues to business increases complexity. Family splits and tensions occur when the business hierarchy and rules do not match the family hierarchy. They have to deal with conflicts of interest, ideas, perspectives and priorities arising from roles that family members have to play of being owners, managers and family members simultaneously.

2. Informality: Because many families run their businesses themselves, there is usually little interest in articulating policies, processes and procedures in the areas of business, family and ownership. Over time this leads to inefficiencies and internal conflicts that threaten business continuity.

3. Lack of discipline: The owner and ‘entitlement’ mindset leads to a lack of discipline among family members.

A well-functioning governance structure will mainly aim at:

* Discovering, renewing and communicating family values.
* Keeping family members informed and abreast of business accomplishments and challenges.
* Ensuring participation in decisions and ensuring communicating rules and decisions regarding benefits and establishing a proper communication channel, as also having a fair process for managing differences.

The major constituents of a family structure are the enunciation of policies and principles governing issues such as employment, entry, exit, decision-making making, succession etc, providing for family institutions such as a family council, family assembly etc, appointment of an advisory board that challenges family perspectives, processes for a leadership pipeline, and agreed processes for managing differences.

READERSPEAK – Seeing Value in Evaluation

“S Sandilya, Chairman, Eicher Group”
“But I presume the challenge is what next. How do we make the process meaningful? Will the Government be willing to change the law to make it more positive in terms of the intention rather than the negative connotation it seems to focus on.”

“Sabyasachi Hajara, Former CMD, Shipping Corporation of India”
“Very well articulated indeed. Totally agree that undertaken objectively and effectively, evaluation can add great value to the functioning of the Boards”

“M K Chouhan, Vice Chairman, Global Advisory Board, Asian Centre for Corporate Governance and Sustainability”
“It’s insightful and reflects the fact that you have your hands on the pulse of the ‘Psyche’ of Indian promoters, IDs and board behaviour!”

“Judge not, that ye be not judged”?!

“Give a dog a bad name and hang him” is a saying that we have all come to terms with. In recent times, there has been no better illustration of this statement than the debates and discussions regarding the evaluation of the Boards of Directors, the Board Committees, the Chairpersons, and the Directors. There are very few persons who see any value in this exercise and even fewer who are willing to express a positive view. The overwhelming majority has persuaded itself that the evaluation exercise is at best a waste of time and at worst sounds the deathknell of a hitherto cohesive Board. While opinions on agenda items during Board discussions might vary, there is common cause made by most persons in the boardroom, and some outside, that the earlier evaluation as a concept is buried, the better it will be for Boards and companies. One can almost hear an exhortation, on the lines of Aurangzeb’s reference to music, that evaluation should be buried so deep that it should never surface again.

The detailed process of evaluation spelt out in Schedule IV of the Companies Act, 2013 is a major part of the problem. In being needlessly prescriptive, it seems to have placed form above substance and understandably put Boards and Directors on the defensive. Somewhere along the way, the fact that evaluation is an assessment to take stock and make improvements has been lost sight of. Tasking the Nomination and Remuneration Committee (NRC) also with the process of evaluation, while vesting the same responsibility in Boards and on Independent Directors (IDs) has confounded the existing confusion.

Yet another impediment, more imaginary than real, is the perception that is sought to be continuously reinforced, that members of Indian Boards do not and will not take constructive feedback positively. The blame for this is sought to be laid at the doorstep of Indian culture and our heightened sensitivity to any external assessment of any deficiency, or room for improvement on our part.

When a process is gone through without seeing any value in it, ab initio, it necessarily translates to an empty avoidable exercise. Evaluation, in the last three years, has had to live with this approach. Since it is statutorily prescribed, there is no way by which companies can avoid this exercise. The common response has been to administer, to the members of the Board, short questionnaires, often comprising questions permitting of only one politically correct answer. The responses are understandably carefully calibrated to avoid causing any offence, either imaginary or real, to any member of the Board, or to the Board as a collective entity. If the resultant evaluations, which rate Boards, Chairpersons, Directors and Committees, as performing consistent with the highest standards, had any grain of truth in them, the stakeholders would never cease to smile and celebrate. Such meaningless exercises, as are increasingly in evidence, give legitimacy to the mutual admiration societies which Boards of Directors have descended to. To expect persons, who shy away from honest evaluation, to measure up to the responsibility of providing superintendence, direction and control is a huge ask.

The points of resistance are many. Chairpersons, especially promoters having a majority stake, wonder whether it should be necessary for anyone, be it the Board as a collective or an outsider to judge her performance, when majority ownership is sometimes treated as sole proprietorship. Directors, who join the Boards on invitation, are often heard to ask whether their performance should be evaluated, when these were not positions that they applied for, but were invited to. The disproportionate importance given to IDs by the Act and the regulations, and the role envisaged for them in the process of evaluation, often prompts executive managements to ask whether these part-time visitors to boardrooms should sit in judgement on the performance of Boards and companies.

Mercifully, there are a few Boards that see value in the exercise. Some of them have sought to reach out to external evaluation consultants and advisors in the expectation that an objective view from the outside would help the Board and the Directors to hold a mirror to themselves. As has happened, times without number, in regard to several other matters, Board evaluation while not yet a cottage industry, finds within its list of practitioners, persons who have not even by accident, been in the vicinity of a boardroom. Importing a textbook understanding of the process into the evaluation exercise, without bringing firsthand boardroom experience to the table has been a major drawback in the recent past.

There can be no doubt that the evaluation process is not only desirable but also necessary, for the large body of stakeholders to satisfy themselves that persons, who provide leadership, on their behalf, to the company, are fit for the job. Clearly the process should be objective, meaningful and result-oriented. If well intentioned corporates dig in, and prevent the baby from being thrown out with the bathwater, a clean, scrubbed and productive evaluation process might still see the light of the day. They must see this as an opportunity rather than an obstacle. A constructive post-evaluation conversation alone can translate to continuous improvement in Board level leadership, failing which, corporates might as well begin to write their obituaries.

 

READERSPEAK – Risk Management – The Elephant in the Room ?

“Vikram Kasbekar, Executive Director Operations (Plants), Hero MotoCorp Limited”
“It is indeed useful.”

Odd as it may sound, to those who mistakenly equate risk with uncertainty, risk is a certainty. Only its nature, extent and impact are partially in the realm of the unknown. Identifying, anticipating, planning, deploying resources, and being in a state of readiness are non-negotiable requirements. The Boy Scouts motto got it right: “Be prepared”. Kiran Karnik and Sunil Mehta opine on how to tame the elephant in the boardroom.

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

Kiran Karnik
Director, Central Board,
Reserve Bank of India
and Former President, Nasscom

Sunil Mehta
Chairman, Punjab National Bank,
Chairman & MD, SPM Capital Advisers
and Former Country Head & CEO, AIG India

Thirty billion dollars. In two days. That is the loss in market capitalisation suffered by the shareholders of Volkswagen in September 2015, because of falsification of engine emissions through manipulation of software by its employees.

In January 2009, the Chairman of Satyam Computers confessed to a fraud of about USD 2 billion, thereby also putting at risk the jobs of some 50,000 employees and the reputation of the Indian IT industry. The safeguard of financial audits clearly don’t always work. In addition, there are now new or enlarged risks related to cyber security, intellectual property, reputation, information technology, disruptive innovations, and – for global companies – geo-political changes.

As a result, risk has now got overt recognition and been elevated for consideration in the Boardroom. However, from what ones sees and hears, Board deliberations on risk are generally perfunctory, and it is treated as one more routine compliance item requiring a tick in the box. Yet, risk, like a land-mine, is often buried and not immediately visible. But, when it explodes, it can cause extensive damage. Often, the danger zones are known, but despite proceeding cautiously, one can yet be surprised by the unexpected and the unknown.

This highlights the need for greater Board vigilance about risk, and putting in place appropriate systems and procedures which minimise risk. How many companies seriously maintain and update a comprehensive risk register? How much time does the Board spend in discussing it? Is it not time for regular Board-initiated third-party risk audits? Will this not possibly forestall a mandatory requirement? These are some questions Board Directors may want to ponder on, before their company steps on a land-mine.

The 2008 economic crisis demonstrated severe inadequacies amongst major global banks / companies, in preparedness to deal with major risks. While many steps have since been taken by regulators and corporate Boards to better prepare financial institutions and respective corporates to deal with unexpected events, regrettably the vulnerabilities continue to be very high across the Board. Many prominent and respected corporates in developed markets and India, continue to be mired in vexing issues resulting in huge reputational and financial loss for companies and their stakeholders.

Boards today have to be fully prepared for a diverse set of risks – fueled by unforeseeable global and domestic financial infirmities, capricious regulatory environment, hyper competition, fast changing market dynamics, intrusive media, environment protection activism, cyber security vulnerability and promoter management relations to name a few. As we have seen in recent months, reputational damage to companies and their boards, failing to preempt and proactively manage these risks, has been immense with incessant and unforgiving media tirade.

The questions we face – Are Boards fully prepared for the risk oversight role? Are they fully satisfied with the risk management policies design and implementation by company leadership? Is business strategy in line with risk appetite? Is risk culture and governance adequately institutionalized? Are there risk-related business processes which transparently highlight risk concentration? Is there lip-service to Enterprise Risk Management or is the Board adequately organized and appraised on risk impact estimation? What is the likelihood of potential risks, their estimated impact and appropriate preparedness to deal with consequences? Boards must recognize, and respond to, the elephant in the boardroom.

READERSPEAK – Extracting Value from Boards

“M. B. N. Rao, Former Chairman and Managing Director, Canara Bank”
“Excellent input to Independent Directors.”

“Sumit Agrawal, Partner, Suvan Law Advisors”
“The piece ‘Extracting Value from Boards’ is compelling. Please keep enabling the excellence.”

That many a Board adds little value, and is merely a decorative presence derived from statute and regulation, is a disquieting truth in the corporate arena. Since Boards cannot be wished away, it is necessary to extract value from them. How is this done? Arun Thiagarajan and V.K. Viswanathan give us some pointers.

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

Arun Thiagarajant
Independent Director on leading
Corporate Boards and former
Chairman, ING Vysya Bank Limited

V. K. Viswanathan
Chairman, Bosch Limited and
Independent Director on leading
Corporate Boards

A Board can be divided into three groups. The first are the representatives of the promoters/ dominant shareholders, including usually the chairman. The second comprises the management, i.e. the MD and executive directors. The third are the independent and non-executive directors. The interplay among these three groups is extremely important if the Board is to add value.

Large industry groups and multinationals have operation and strategy reviews outside the Board, and decisions are taken, which are then ratified by the Board as a formality. The resultant information asymmetry affects the ability of Independent Directors to adequately participate and to question Board proposals. The Chairman must ensure that sufficient briefing is given to the outside directors.

Board composition is very important. The members should represent a range of different backgrounds that could benefit the company. There must be at least one independent director with experience of the company’s type of business. The Chairman must ensure that the views of directors are actively sought. When discussing important issues, the practice of having a “devil’s advocate” is a good one.

The pressure of quarterly results, together with the increasing items on Corporate Governance, means that time is often in short supply. One good practice is to schedule six meetings, with two meetings to discuss the annual budget and long term strategy respectively.

Disruptive technologies and business models, and their impact on the future must be discussed. Agility and adaptiveness are keys in today’s fast changing world. Ensuring management depth and succession planning are also important Board subjects. Finally the Board adds most value if it can influence the culture of the organisation to become an open, forward looking and ethical entity that can properly balance short term results with long term strategic thinking in the interest of all stakeholders.

Three “C’s” are critical in extracting and enhancing value from Boards.

Composition of the Board:

It would be critical to first decide what kind of board is right for the company as this will provide strategic and effective framework. The Chairman’s role in ensuring a good mix by way of rich experience, deep understanding of business, practical orientation and diversity, enabling a platform for free and open discussions including divergent viewpoints for arriving at a good and optimal decision will enhance value for the company.

The composition of the Committees is equally important. The committees should comprise specialists and experts in their fields and should also be truly empowered to deliver on their respective charters. Committees, being more involved and focused on specific business issues, should give their considered recommendations for the Board to deliberate and decide.

Commitment, Content and Constructive engagetment:

Key issues, both strategic and operational, are to be continuously identified and addressed by the Board on an ongoing basis. The Board must strive to achieve a judicious balance between strategic and operational performance issues. This also keeps the balance between entrepreneurship and effective governance for long term value creation. Independent directors must devote adequate time and bring their external expertise and independent judgement to the Board’s deliberations.

Compliance and governance:

Upholding high standards of ethics and integrity in all dealings is a key factor for long term success of a company. The company must practice zero tolerance for non-compliance in respect of ethical values, legality principles and conflicts of interest.

Successful Boards are cohesive, coordinated and constructive, and definitely not cozy clubs.

READERSPEAK – Breathing Life into Stakeholders Relationship Committees

“Vikram Singh Mehta, Executive Chairman, Brookings India and former CEO of Shell India”
“This is an excellent piece.”

 

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

Even junior artistes have the privilege of being seen, albeit in crowd scenes, and sometimes getting to mouth a line or two. However, the Stakeholders Relationship Committee (SRC) in one large listed entity is both unseen and unheard in an ongoing corporate movie starring the Board, the management, the Chairs of the Nomination and Remuneration Committee (NRC)and the Audit Committee (AC), a significant shareholder with grievances, and a law firm. This clearly flies in the face of the provisions in the statute tasking the SRC with considering and resolving the grievances of security holders of the company.

The problem has its origin in the stepmotherly treatment given to the SRC. While the SEBI Listing Obligations and Disclosure Requirements (LODR) Regulations, 2015 stipulate that Independent Directors (IDs) shall chair the AC and the NRC, the corresponding provision relating to the SRC is that a Non-Executive Director (NED) shall chair the SRC. NEDs, other than IDs, are often family members who have no executive responsibility in the company concerned and getting one of them to chair the SRC is akin to being a judge in one’s family’s cause. Such a committee’s reaction or response is often to justify or explain the actions of the management in regard to matters that give rise to grievances of security holders. With the earlier Shareholders Grievance Committee (SGC) having being renamed as the SRC, it is legitimate for stakeholders to expect a committee that is more proactive and has a wider sweep in terms of its responsibilities. Regrettably, the Companies Act, 2013 (the Act) mandates the committee to only look into and resolve the grievances of security holders. SEBI LODR Regulations while seeking to elaborate the statutory prescription, specifically list “considering and resolving the grievances of the security holders of the listed entity including complaints related to transfer of shares, non-receipt of annual report and non-receipt of declared dividends” as the identified areas of grievances that the committee has to address. Mercifully, the Regulations use the word “including”, giving rise to the possibility that the committee can travel beyond the listed subjects and address other grievances. In practice, there are very few companies that have seen any virtue in such an approach. If the words “but not limited to” had been used in the Regulations after the word “including”, there might have been a gentle persuasive push to the committee to look at other issues.

There is also the avoidable confusion created by the Act by grandiosely using the word “stakeholders” while naming the committee, and the words “security holders” while mandating the area of responsibility of the committee. Considering that stakeholders’ democracy is paramount in corporate governance, it would be useful for proactive SRCs to venture into areas that are not proscribed by law, even if they have not been expressly prescribed as responsibilities of the SRC. To elaborate, nothing should prevent the SRC from addressing grievances of stakeholders such as vendors, customers, distributors, employees, and the like, except where there is a statutory carve-out as in the case of the vigil mechanism which the AC is tasked to deal with. The handful of companies that have persuaded themselves to move beyond routine items like non-receipt of dividends and annual reports have obtained significant insights from grievances of other stakeholders, leading to systemic improvements.

It is also necessary for the committee to recognize that it is a relationship committee. Even at the risk of stating the obvious, it is worth mentioning that this is a committee that ought to relate and not merely to respond or react. A good SRC would be one that demonstrates initiative in identifying issues that stakeholders have, before they take the shape of grievances that are often dealt with on a case-to-case basis without process improvements being put in place.

Given that many of the suggested amendments to the Act have originated from industry associations seeking to do away with real or imaginary obstacles in conduct of business, it would be futile to expect that statutory changes would take place in regard to the SRC. Well-intentioned companies should see the prescriptive arrangements of the statute as the bare minimum requirement and should strengthen and breathe life into the SRCs. If companies seriously wish to practice the corporate governance principles that they often talk about, a good starting point would be the constitution of a strong SRC tasked to proactively relate to stakeholders and capture their valuable insights which can be put to productive use. Failing this, stakeholders could commence the process of disengagement with the company and shareholders could well vote with their feet.

Excellence Enablers recently organized a roundtable on “Breathing Life into Stakeholders Relationship Committees”. The participants represented a mix of Chairpersons (including promoter and professional Chairpersons), CEOs, senior Company Secretaries and other senior functionaries in the corporate world. For summary of discussions of the deliberations, please visit our website www.excellenceenablers.com.

 

READERSPEAK – Chairperson – Superboss or First Among Equals?

“M. V. Nair, Chairman, Credit Information Bureau of India (CIBIL)”

“Informative and useful perspective.”

“I am monarch of all I survey;My right there is none to dispute.”

“Give every man thine ear, but few thy voice.”

William Cowper The Solitude of Alexander Selkirk

Polonius to his son Laertes

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

R. S. Sharma
Former Chairman and Managing Director,
Oil and Natural Gas Corporation (ONGC)

The lead actor in the theatre of corporate activity is the Chairperson of the Board. She has to provide the enabling environment in which each Director contributes to informed discussions, debate and decision-making. In Boards, as in any other collection of individuals, there are persons who have something to say, as also persons who believe they have to say something. Keeping the interventions relevant, and the discussions on track is a skillset that Chairpersons must necessarily have. To sit back, and watch with indifference or unconcern, the performance of Boardroom bullies is not a luxury that is available. At the same time, interrupting every speaker midsentence and imposing one’s views because of the leadership role, is counterproductive in the context of collective decision-making.

The challenge is higher for Executive Chairpersons who have risen from the ranks. The tendency to see oneself as the sole repository of wisdom and knowledge almost always translates to seeing the others in the Boardroom as only making up the numbers without having anything to contribute. As against this, there are Chairpersons who, having welcomed Board colleagues to the meeting (thank God, they do at least that!), lapse into studied silence, leaving it to the Company Secretary or the Managing Director to conduct the proceedings.

Reality is often no respecter of enacted law, which does not envisage a Superboss. Overimposing, centre-of-the-world leadership styles have contributed to negating the Primus inter pares (first among equals) role of Chairpersons in Boardrooms.

Between the practitioner of benign neglect of her role, and the not-so benevolent dictator who believes that she is the company and “the rest is mere detail”, is the genuine Boardroom leader who seeks to involve everyone in a constructive conversation focused on the company’s goals. Encouraging the expression of diverse, often conflicting views, focusing on issues and not individuals, and practicing harmonious construction leading to decision-making, a good Chairperson commands the respect of her team. Maturity, wisdom and character are the building blocks on which this approach is premised.

Steering the ship, sometimes through stormy seas, to safe shores sets a good Chairperson apart from the crowd. By common consent, even without the prop of legal provisions, such a person is first among equals. Superboss – definitely not. Superperson? Possibly!

The term Chairman or Chairperson is not defined in the Companies Act, 2013 (The Act). Unless specifically provided for in the Articles of Association, one of the Directors is elected by the members of the Board to function as Chairperson. The Act also does not prescribe any qualifications for the Chairperson.

Various sections of the Act deal with the functioning of the Chairperson. Substantively, the Chairperson has the prime responsibility for conduct of Board meetings, which warrants that she must possess certain abilities and qualities expected of a leader, to be impartial, well informed of the law(s), practice, proceedings, procedures and rules. In doing this, she is supported by the Company Secretary for ensuring strict compliance of the relevant provisions of the Act.

The Chairperson has the responsibility to ensure that the views of all Directors are heard during deliberations, and the Board Meetings achieve the purposes for which they are convened. She has a lead role in reviewing the composition, efficiency, and performance of the Board. The Chairperson is also primarily responsible for all governance practices in the functioning of Board. While she has all responsibilities for effective functioning, she does not hold any veto or special powers to steer a decision in majority views. The only special power vested with the Chairperson is a casting vote if so provided in case of a tie.

I was privileged to be on the Board of the largest corporate entity of this country for 9 years during 2002-2011, and for more than half of that period as Chairman & Managing Director. When I superannuated in January, 2011, ONGC had the distinctions of having the largest market Cap, highest profits, highest dividend, and highest tax paying corporate entity.

With my own experience, I may share that the position of Chairperson warrants top quality of justice, fairness, equity, exemplary personal conduct and leadership to be effective. These leadership qualities call for ability to carry the Board members, allow equal opportunities for everyone to freely express, maintain time sanctity and ensure the resolutions are passed ideally with unanimity, but necessarily with majority views.

It is therefore clear that the Chairperson is not a Super Boss but only First Among Equals.

We live life in the increasingly shrinking space between disclaimers and disclosures. An opinion, fenced in, and sometimes hidden, by “ifs, buts, and wherefores” cannot give rise to much confidence. Obfuscating what ought to be obvious, advice that is rendered, and paid for, sometimes proves the adage that language was given to man to conceal his thoughts. Reading between the lines is no longer an option, but a compulsion. As you will see below, Vinita Bali and Eki Kshirsagar don’t pull their punches.

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

Vinita Bali
Independent Non-Executive Director on Boards
and Former Managing Director
and Chief Executive Officer,Britannia Industries

EA Kshirsagar
Independent Non-Executive Director on Boards
and Former Director-in-charge, A.F. Ferguson & Co.
(Management Consultancy Division)

Common sense and logic suggest that any disclosure with a disclaimer, in its very essence, is contradictory. The dictionary defines disclosure as “the act of making something known”, whereas a disclaimer is a statement that denies something, especially responsibility. Furthermore, a disclaimer is a formal statement that the person or company making the statement is not legally responsible for something.

The purpose of a disclosure is to give added information to financial statements, usually as an explanation for activities that have significantly influenced the company’s financial results. If we hold this to be true, then a statement by auditors that they do not express an opinion on the financial position of a firm because their examination is not broad enough to enable them to form an opinion, is contradictory at best, and effectively, an abdication of responsibility. The role of auditors is to report and comment on governance practices in the companies they audit, and disclosures are meant to provide shareholders with the information that they need to assess the performance of the company and the directors’ stewardship of their assets. As share ownership moves from individuals to institutions, the responsibility for reporting in fact increases.

The objective must therefore be to continually improve the quality, relevance, usefulness and timeliness of information to shareholders. Additionally, with the changing expectations that society and investors have of companies, and the way they fulfil those obligations and duties, Boards now have greater responsibility, including risk management, and the role of Directors is more demanding than it once was.

Disclosures with Disclaimers do not inspire a great sense of confidence.

Do disclaimers hurt disclosures? Of course they do because the adviser’s opinion is meant to assure the user of the report that the contents of the report have been independently examined and found to be in order. But wait, life is not so simple! Stricter laws and complex regulations mean that it is not in the interest of the adviser to give a clear Yea or Nay. So begins the great game of drafting the report and its disclaimers! The denser the language, the more twisted the syntax, the better it is. After all, the purpose for all concerned is to have a report appended. Who reads it anyways? If anyone does, good luck to them to deal with the verbiage.

Many hours of my youth were wasted in drafting such reports / notes for certificates to the Controller of Capital Issues, the Controller of Imports etc. These august bodies had the power of life and death over the client, and all they wanted was a certificate to be appended. What it said was often not read. So the conscientious professional put in a forest of Christmas trees of disclaimers and got his fee. But why was all this charade required? Those were the Permit / Licence Raj days.

We are now liberated, or so we think. Now the devil has taken on a new avatar as the Regulator. He is the natural descendant of the previous controllers and has the same DNA. Therefore, the same need for disclosures and reports thereon. So the cycle of life goes on as before!.

READERSPEAK – Contemporary Issues in Corporate Governance

“G. Pradeepkumar, Chief Executive Officer, Union Asset Management Company”
“This was a brilliant piece explaining the concept of corporate governance and the key issues that one faces today on this subject, in the most lucid language. It also sets out clear actions that could be undertaken by the industry, regulators and the government to improve governance. I really wish that every person with interest in corporate governance reads this newsletter.”