Newsletter Category: 2019

The question, whether the positions of Chairperson and Managing Director / Chief Executive Officer (CEO) should be held by different persons, has, for long, engaged the minds of observers of the corporate scene in India. With the United Kingdom and a few other jurisdictions having moved significantly to a position of separating the two roles, and with the United States and some other jurisdictions still seeing merit in combining the two roles in the same individual, there are enough protagonists on either side in India.

Until recently, it was safe to state that the jury was still out on whether the two roles should be separated in the Indian context. Playing judge, jury and possibly executioner (in the eyes of a part of corporate India) SEBI has finally settled the argument. It has laid down, through an amendment in the LODR, that companies, which constitute the top 500 listed entities by market cap, shall ensure that with effect from April 1, 2020, the Chairperson of the Board shall be a Non-Executive Director and shall not be related to the Managing Director (MD) or CEO.

Not unexpectedly, there are reports of a pushback by sections of corporate India. Many large listed entities have for years had the roles of the Chairperson and the MD being performed by same individual. It is not easy to conceive a position in which a promoter Chairperson cum Managing Director (CMD) would willingly give up either the Chairperson’s role or an Executive role, which would be denied to her/him if he is to continue as Chairperson.

To understand the context, it is necessary to go back in history. The distrust of the businessman has been one of the defining features in conversations related to the corporate world. Starting out with the belief that, if left alone, the promoter CMD would resort to mischief, a number of safeguards have been put in place from time to time. The separation of the two roles is the latest in this series. Theoretically, it is difficult to quarrel with an arrangement in which the management, represented by the MD or the CEO, is held accountable to the Board chaired by a Non-Executive Director, with the Board acting as the representative as well as the custodian of the interest of the large body of stakeholders. In practice, however, things could work out differently. It has already been noticed that in some organsations the promoter assumes the role of Vice-Chairperson and MD and gets a benevolent unquestioning person appointed as Chairperson. The only thing that gets in the way of this arrangement is the fact that many of the persons have already been Chairpersons and any other position is seen as a demotion. Some Boards have an Executive Chairperson and an Executive Vice-Chairperson, leaving one to wonder whether the CEO is non-executive! SEBI has now put paid to all these accommodative arrangements.

SEBI’s stipulations travel well beyond the recommendations of the Kotak Committee on Corporate Governance. The Kotak Committee, after deliberation, recommended that, to begin with, the separation of the two roles should take place in companies with atleast 40% public shareholding. Carving out a universe based on public shareholding was felt to be the right way of gradually ushering in this element of shareholder democracy. SEBI however has chosen to define the universe in terms of the size of the company by market cap. This approach would ensure that the bigger companies do not escape this forward looking move on the part of the Regulator. With several large companies having public shareholding below 40%, it would also have been possible for those managements and promoters to keep their companies outside the ambit of the first stage of introduction of the separation of the two roles.

Recent events have demonstrated that the so-called professional-run companies, without an identifiable promoter, are not necessarily well governed. As pointed out in one of our earlier newsletters, three of the major Corporate Governance failures in the last year have been in companies, described as non-promoter companies, within 200 meters of one another in Mumbai’s financial district. The proposed separation already exists in those companies, and therefore, to pretend that this is the panacea for all ills is to willingly suspend disbelief. Taking an example from those companies, the promoter-led companies could install a convenient Non-Executive Chairperson and run the company in the manner that the promoter chooses. Compliance in form will be achieved, but the stated objective of empowering the Board vis-a-vis management will not be achieved.

Promoters also argue that they have skin in the game and will not act in a manner inconsistent with the interests of the company. The absence of domain expertise is also cited as a weakness that could prevent a Non-Executive Chairperson from providing effective leadership to the Board.

The requirement that the Chairperson shall not be related to the MD or the CEO seems to be unique to India. It proceeds on the assumption that two persons, if they happen to be related, would necessarily act in concert and would together ignore the interests of other stakeholders. This apprehension would seem to be without basis in the Indian context. Indian corporate history is replete with instances of persons related to each other disagreeing on most matters and prejudicially affecting the performance of the company. Internecine warfare has been the staple diet of corporate historians. Further, given that SEBI has travelled in this direction, it could have revisited the list of relatives, which presently leaves a lot to be desired.

As for the public sector, the separation of roles as well as the timeline could be yet another instance to show the world that compliance is for other entities. Did we not see it when it took them ages to appoint the requisite number of Independent Directors and women Directors?

Post April 1, 2020, (unless corporate India forces a deferment, if not an abrogation) corporate boardrooms could sport a different look. Many of them will need to accommodate a Non-Executive Chairperson. The chairs will need to be rearranged. Rearranging the furniture on the deck of the Titanic? Hopefully, not yet.

 

READERSPEAK – THE YEAR THAT MIGHT HAVE BEEN

Siddharth Shriram, former CMD, Mawana Sugars
“Isn’t it strange that mainly the highly placed, well paid and extremely well remunerated in monetary and psychic terms, need to resort to, to put it mildly, illicitly extending their good fortune? It’s all over the world.”

Ireena Vittal, Independent Director on several leading Boards
“What an amazing note… Wordsworth, dreams and ethics, all combined in one.”

S Sandilya, Chairman, Eicher Motors
“The Public Laundry is getting filled with a lot of linen and the situation is becoming like the Bangalore lakes or the Ganges. We need a Swachh Corporate Mission, perhaps!!”

Ajai Kumar, Former CMD, Corporation Bank
“Very interesting summing up of 2018, the year that was.”

VA George, Managing Director, Thejo Engineering
“Excellent piece! You have nicely summarized the various noteworthy events in the Indian Corporate world during 2018 in one page.”

It is that time of the year when reviewers of all descriptions and dispositions take a look at the rearview mirror and pronounce on what transpired in the preceding twelve months. Objectivity is sacrificed and personal prejudices rule the roost. We use the retrospectograh (a machine not invented) to ask ourselves “what if……..”. All resemblances to persons and events are not coincidental.

Four public sector undertakings, holding 74% of the shareholding in an asset management company, are at daggers drawn with a foreign institutional investor holding 26%. The term of appointment of the Managing Director (MD) and CEO is to end in the second half of the year. While the four Indian entities are pushing for change, the foreign shareholder is insisting on a fresh term of office for the incumbent MD and CEO. Considering that time is running out and that a decision is required to be taken soon in the interest of the organisation, a meeting of the Board of Directors is called at short notice. After detailed discussions during which contrasting viewpoints are expressed on the performance of the MD and CEO and on the need for a change, it is decided in the interest of the organsation that the present MD and CEO shall continue for twelve more months in that capacity, and during the period of extension both contending parties would continue to engage in order to find a mutually acceptable solution.

The Board of Directors of a very large private sector bank receive a complaint that the spouse of the MD and CEO has a business relationship with a group, which in turn has a borrowing relationship with the bank. The complaint alleges conflict of interest and hints at the possibility of corrupt practices. The Board of Directors, in a hurriedly convened meeting, shares the letter of complaint with the MD and CEO and seeks the latter’s response thereto. The CEO contests the content of the letter. Following detailed discussions, between the Board and the CEO, it is decided that the CEO shall proceed on leave for a few months and an independent outside authority will enquire into the allegations. Since institutional interest is considered paramount, the CEO agrees with the suggestion and proceeds on leave and the Board at the same time, decides on an external enquiry. It is agreed by both parties that if the enquiry leads to a favourable finding, the CEO will resume duties, and, having regard to the fact that the remaining period of the contract is only a few months, will take a decision on staying till the period of appointment is over or making an exit that might seem premature but will enhance governance standards. Accordingly, the CEO leaves and an interim CEO is appointed.

The Board of Directors of a very large insurance company decides to become a majority shareholder in a beleaguered public sector bank. It is recognized by the Board of Directors that an investment which makes the insurance company a significant (above 10%) shareholder will need the approval of the insurance regulator. During discussions, some of the Directors point out that the insurance company is primary responsible to its policyholders and that there is no pressing case for turning into a majority shareholder in a stressed public sector bank. At the same time, a view is expressed that the longstanding desire of the insurance company to have a bank of its own can be fulfilled by majority shareholding in the bank under examination. Protracted discussions ensue and there is no finality. Separately, the Board of Directors of the public sector bank decide that there is no great merit in agreeing to the insurance institution becoming the majority shareholder in place of the Government of India. It is also felt that this was not the first time that the bank or its parent institution was facing serious existential problems. On the previous occasion, it had been addressed by the creation of the Stressed Assets Stabilization Fund (SASF). A view is expressed that something similar can be attempted this time. The meeting concludes without any final decision. Simultaneously, the insurance entity files an application with the insurance regulator indicating its intention to acquire a commercial bank and seeking informal advice on whether permission is likely to be granted to acquire 51% shareholding in the bank when the limit prescribed by the regulator for such investments is 10%. The regulator responds by saying that there is no merit in such a proposal and that the insurance entity owed its duty primarily to policyholders. The regulator also advises the insurance company that if there was a felt need to become a majority shareholder in a commercial bank, the purpose will be achieved subject to regulatory approval, by increasing the shareholding in another bank where the insurance entity already held 26% of the shareholding.

A large private sector bank is informed by the banking regulator that there is a very significant divergence between the NPA figures indicated by the bank and the NPA figures determined by the regulator. This large divergence would significantly impact the finalised results which had been communicated to shareholders and other stakeholders. After the next steps are discussed at the meeting of the Board of Directors, the MD and CEO whose term is to expire in a few months, decides to go to RBI and to state that while he does not agree with the findings, he has no desire to enter into a public dispute on the subject and that if he had done anything remiss, he would be prepared to take the rap and move on. The MD and CEO makes an offer to RBI that he would step down after three months, during which period a new MD and CEO would be inducted.

The auditors of an entity, owning a leading airline, indicate their inability to certify the entity as a “going concern”. The Audit Committee meets soon thereafter and engages with the auditors to identify / confirm the problem areas and to determine remedial action(s). A leading management consultancy firm is brought in to prepare a roadmap for immediate improvement. Cost cutting, wherever necessary, is resorted to. Major stakeholders, such as representative unions and associations, are brought into the conversation, so that the sincerity of the attempts being made is effectively communicated and their buy-in obtained. Exploratory efforts are made to bring in a major investor. Questionable practices that have come to the adverse notice of investigative agencies are promptly discontinued and responsibility fixed on the persons responsible therefor. Meanwhile, aviation fuel prices, a major villain of the piece hitherto, starts moving southwards.

Based on a whistleblower complaint, an Exchange, which is a first-level regulator in the securities market, discovers that some brokers by virtue of co-location with the Exchange, are privy to faster information, translating to a huge economic advantage. The senior management team immediately does a deep dive into the issue, identifies the problem and engages an expert agency to help it find a quick and effective solution. The Exchange, on its own, informs SEBI regarding the problem and the steps being taken to address it. The persons responsible and outside contributors, if any, to the problem are identified and promptly taken out of the equation. The whistleblower is suitably rewarded for his role in bringing the problem to the notice of the Exchange.

Two brothers, meet one morning, at breakfast, to discuss an emergent matter. A foreign entity to whom they sold their interest in a pharma company, has accused them of withholding vital information. They seek a meeting with the entity to iron out matters. Meanwhile, facing a cash crunch and having several commitments, they put a hospital company on the block. A transparent bidding process follows and the highest bid is accepted. The proceeds are used to meet their commitments and all litigation is avoided.

William Wordsworth, the poet laureate of yore, recalled that, lying on his couch, “in vacant or in pensive mood”, his heart danced with the daffodils. Corporate historians, rewinding to 2018, will pensively remember nothing more than heartwrenching fiddles.