Recently Mr.T.T.Ram Mohan wrote a
column in Economic Times( dtd Jan 31,
2013: Sebi Dodges the Central Issue) referring to the consultative paper on
corporate governance by SEBI and considered the paper laudable except for that
it fails to address the central issue, viz the appointment of independent
directors. He goes on to explain how independent directors(IDs) shall be
appointed and what should be the composition of them and discusses many
other many other like the nature of the present day IDs and other contentious issues like
compensating IDs, diversity of IDs etc.
All his concerns & arguments
are based on an assumption that IDs are
required there on the board because they have to take care of the interests of
the shareholders other than promoters and management. But I’m afraid that he
too misses the very concept why the very corporate governance is required.
Corporate governance is essentially required because a corporate (be it public
or private) is given the status of an
artificial entity. While this entity has been created for certain stated
purposes, and company related laws and regulations everywhere in the world
treats it as just another individual who can rent, buy and own property, has to
pay taxes, will be punishable under the law etc, it doesn’t have the ‘life’
that we see in other individuals. The people working there give life to it. While
employees working under the so called ‘management’ tries to achieve the physical purposes for which the entity has been
created, the board of directors oversees and ensures that the management does
the right things to maintain the very rightful and valid ways in which the entity is supposed to
operate and achieves its aims or the
board must ‘govern’ it.
As we all know, the entrepreneurs
who has great entrepreneurship in them have chosen the corporate form to implement their ideas for
specific reasons: the corporate can mobilize money from people beyond the
promoters(the ability varying depending
on whether the entity is private limited or public limited); notwithstanding
their ability to mobilize large funds from others, their liability is limited;
and today in a globalized context, such entities can attract investments from any
part of the world etc etc.
Despite all this knowledge that
the entity is distinct from them, the
entrepreneurs or promoters can (and usually do): one, treat them as extension
of the promoters themselves and treat the entity as an extension of his immediate
family.”I established it, hence I will do whatever I want with the entity; it
is my creation’, is a normal attitude. And, they treat it as too close to them,
conveniently forgetting its lawful, separate entity status. While this may not
much harm per se to the entity, and
because of the care and passion the entrepreneur/promoter shows may generate
immense wealth too. But, it is likely that he may be tempted to take decisions
which will further the interests of
himself or promoters or families etc, while ignoring the interests of the
entity. Because he holds a sizable stake he will ensure that he is able to put
through decisions, all not necessarily
auguring well for the entity. In India, the promoters hold high stakes ,
sometimes even absolute majority. Second, the entrepreneur very well knows that
it is a separate entity and in the process of growth of the entity mobilizes
more capital from outside and reduces his stake as time passes by and some point of time has only a nominal stake(which only a
discernible investor or analyst will know) but still being in command pushes
through all the decisions of the promoter or the family. The promoter gradually
loots the entity for personal aggrandizement , leaving the entity in dangerous
waters.
While Jindal Steel &
Power could be an example of the first
category(where promoter Naveen Jindal pushed through a resolution for giving
him power to determine the compensation paid to all whole-time directors
including himself because he controls close to 59 % in the company), Satyam
Computer can be an example for the second. Both ways are dangerous for the
entity. And these are the typical examples where the governance of the entity
comes into picture. If the board has only nominees of the promoters as its
members, it is rather easy for the promoter to push any decisions through .That
is when the significance of the IDs appear. Being independent of promoters and
management, they can question the decisions promoters/management looking from
the entity’s side. Does it help if IDS are nominated by other shareholders or
minority shareholders? Not necessarily. IDs who are nominees of other
shareholders will have definite briefs
to protect interests of those who nominated them; they can no longer
take an independent view of what is good for the entity. Hence IDs must be free
of any affiliation.
Now, regarding the percentage of
IDs. When the developed world is moving towards a scenario where there is only one or a very limited
number of internal directors(like CEO and COO etc) and the rest are all IDs, we
are trying to put the clock back. SEBI’s Clause 49 mandated 50% of the members
shall be independent if the Chairman is full time or a nominee of the
promoters, but the new company bill is
proposing the proportion of the IDs shall be one third. This ensures that the
management always gets majority approval
for any decisions in the board room.
Where do you get good IDs ? India
is supposed to have an excellent
management pool who can be tapped. Since the concept of IDs has been in
practice only for a decade or so, and
they have always been nominated by management/promoters, initially it may not
be possible to get excellent IDs immediately, but they can be developed over a
period of time. The IDs shall be nominated by a nominations committee,
constituted only of IDs. Management or other shareholders must have no say in it.
Mr.Ram Mohan also discusses about
the compensation of IDs. Both who should pay and how much should be paid is
very important. An independent remuneration committee must take decisions on
remunerations to all directors including the IDs. While deciding on how
much, the committee has to look at the kind of involvement that the IDs have to
take on, the ability of the company to pay, the size and profitability of the
company, the prevailing remuneration in the industry etc. There has been lots of concerns about the
remuneration paid to IDs. Some apparently pay too high; of course nobody
complains but get a little upset when they understand that the independent
chairman at Infosys gets paid more than
the CEO and other IDs get paid very
close to the Whole-time Directors and also when they come to know that the IDs are
paid a pittance at Jindal Steel when the
CEO ‘takes’ Rs.73.42 Crores.
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