Background: In just over a year since the Securities and Exchange Board of India’s (SEBI) corporate governance rules came into existence, Indian companies have shown that the can follow the rules without necessarily imbibing the spirit of good governance.
But Indian companies actually began to look good in comparison with the extent of corporate scandal and outright fraud that continues to be unearthed in some of the biggest and most respected companies of the world.
The corporate clean up that followed revelations from Enron, WorldCom, Tyco, Morgan Stanley etc. led to a further tightening of rules in India. What followed was the N.Narayana Murthy Committee set up by SEBI (Click here for more) and the Naresh Chandra Committee ( Click here for more) by the Department of Company Affairs (DCA) –. Between them, the two reports have examined all corporate relationships and come up with a set of recommendations that would make corporate disclosures more comprehensive and the capital market safer for investors.
But corporate India is furious. I learn that the Tata group, surprisingly enough, dashed off a letter to the powerful Confederation of Indian Industries (CII) asking why it had not objected to some of the recommendations. Rahul Bajaj, Chairman of Bajaj Auto, speaking at the CII’s Western Region Annual Meeting last month felt that “we are going too far” with the disclosures.
CII then decided to debate the issue at its Annual Meeting in Delhi on April 28 and 29.
The CII’s main grouse is apparently the Narayana Murthy Committee’s recommendation that independent directors should step down from the board after three terms of three years each. Which is nine years prospectively after the recommendation is accepted (if it is accepted by SEBI and made mandatory).
Speaking at the seminar, Senior Tata Director J.J.Irani said that directors began to make the best contribution only after they have been on the board for 20 odd years. Considering that people are usually invited to be directors only after they are 45 or older, J.J.Irani seems to suggest that an independent director is truly useful only after the age of 65. Yet, most world leaders today are in their 40s and 50s. Bill Clinton finished two terms as the most powerful man on earth by the age of 52. Tony Blair is under 50 so is Russia’s Vladimir Putin.
Ironically, R.Gopalakrishnan, a senior Tata director specifically represented the Tata group on the committee but he made no dissent while on the committee. In fact, another highly regarded committee member is a director on several Tata companies and he did not object either.
It makes you wonder whether the recommendations of the Narayana Murthy Committee are really the issue, or there are other worries at work here.
The CII invited me to participate in its discussion on April 29. Here is what I think and what I said at the meeting.
CII National Conference – April 29 Thank you for inviting me to what promises to be a tricky session. I hope can be at least as blunt on the subject of corporate governance as Rahul Bajaj was about Narendra Modi’s governance.
I am told that this particular discussion is born out of Corporate India’s fear that we are going too far on the issue of corporate governance. That we are getting “holier” than most developing and developed countries. And, that there is no rationale for rules and disclosures being made more stringent.
Lets look at various events since the code came into existence. The CII triggered off the good governance debate and published its code for desirable corporate governance in 1998. This was followed by the Kumar Mangalam Birla report --- substantially a copy of the CII code- that was converted into a mandatory reporting requirement by SEBI under the listing agreement of stock exchanges.
Is SEBI wrong in tightening the rules after the Kumar Birla code? Surely, those of you who have followed corporate developments, after SEBI’s code became mandatory can’t be asking that question.
If the focus of good corporate governance is maximising shareholder value, while ensuring fairness to all stakeholders—then Indian companies haven’t done too well.
The best of corporate groups have short-changed investors—especially during mergers and takeovers.
Independence of directors has been exposed as a sham in some of the best groups, which were unable to spot rampant insider trading and illegality. · Our largest private sector companies have brazenly indulged in price manipulation and, dare I say, insider trading. · Leading companies have found obnoxious loopholes or used the opaqueness of Sec. 391 of the companies act (or the scheme of arrangement via the High Court route) to leave retail investors out in the cold. Yet, these are the people they call their co-owners. AND, I am not talking about the bottom 1000 of India’s 6000 odd listed companies – I speak about the top 50.
Whenever we discuss good governance, the issue of form v/s substance comes up repeatedly. Has the code led to compliance in substance? Many of you will readily admit that it has not. Even today, very few companies appoint truly independent directors. One industrialist told me that the renowned international banker on his board happens to be his ‘sadu’ – which makes him technically ‘independent’ but not necessarily so. I am sure there are a hundred other examples.
Had SEBI’s code actually worked, we ought to have seen a revival in investor confidence and some signs of the primary market looking up. That has not happened. And it is not because companies don’t need money. There are at least three good issue waiting to hit the market – Maruti, TCS and maybe Bharat Petroleum – but they are reportedly worried about poor investor response. So clearly, there is scope for a sequel to the Kumar Birla effort.
Now consider the strange reactions to the Narayana Murthy committee report. Instead of being released for discussion on SEBI’s website, the report, curiously enough found its way to the Finance Secretary (FS). I learnt from government sources that the report could not be released until the FS gave our “independent regulator” the green signal to do so.
Now that it has been released for discussion, corporate India is worried that its implementation would make it “holier” than other developed countries.
Well, my suspicion is that most of these worries stem from the fact that Narayana Murthy headed the committee.
Why? Because Mr. Murthy heads a company that Forbes magazine described as “a model of transparency, not just for the rest of corporate India but for companies everywhere”. He mentors the only company in the world to publish financial statements according to the accounting standards of eight countries. And there is a probably a justifiable fear that this man maybe trying to impose his standards on the rest of corporate India.
If that is indeed a worry, then you have got it all wrong. In fact, because of his insistence on democratic proceedings, he couldn’t impose his views even on the committee – not that he tried—he was insistent on a workable code rather than a fanciful one. Funnily enough, the same democratic proceeding also ensured that SEBI could not impose its views about corporate governance ratings on the committee.
Let me take a few minutes of your time to describe how Mr.Murthy conducted the proceedings. The entire report was completed in exactly three meetings – not because he wrote the whole report – or sub-contracted it to Omkar (Dr.Omkar Goswami is a Senior Economist with the CII and a director of Infosys Technologies), -- but because he followed a system of elimination of less favoured issues.
The homework began before the first meeting with every member submitting a two-page note on governance issues that ought to be taken up by the committee. These were aggregated, by Infosys—and converted into a simple set of points for further discussion. This eliminated the usual round of opinions and speeches that usually happen on Day 1 of any new committee.
The discussion led to the identification of 75 odd issues. Each committee member was then asked to rate every one of these on a scale of 1 to 10, on the following parameters:
Importance: is the issue important enough
Fairness: Does the report enhance fairness?
Accountability: Will it make companies more accountable?
Transparency: Will it increase transparency?
Ease of implementation: Is it easy to implement?
Verifiability: Is the recommendation verifiable?
Enforceability: Is it enforceable?
The submissions were again processed by Infosys – or rather Sumant Chidambi of Progeon – and aggregated. Only those issues that scored more than 50 marks were taken up for discussion at the second meeting. These were issues that received high ratings from a majority of members.
The result? All extreme views were eliminated.
What is more important from your point of view is that several issues raised by the four investor activists on the committee scored below 40 and were eliminated. Since the process was transparent, there were no protests. In fact, there has been one belated dissent note from Prof. Manubhai Shah. Significantly enough, his views have not been endorsed by the other investor activists in a mindless show of solidarity. (Click here for more)
Similarly, some demands were diluted by a majority vote. For instance, the debate on the term of independent directors started with a demand that independent directors much change every 3 to 5 years. Finally, the majority decision settled for almost a decade – three terms of three years, to be applied prospectively. This means, that all companies have nearly a decade in which to expand the pool of people capable of being their directors. Or to spot talent outside your current charmed circle.
Finally, I suspect that when SEBI set up the Narayana Murthy committee, it hoped that the committee would endorse its pet project of mandating corporate governance ratings. But despite an eloquent presentation by SEBI officials, the committee has not recommended mandatory corporate governance ratings. In fact, Narayana Murthy was one of those who insisted that they are far too subjective to work—although he surely had no reason to worry about his own rating.
Since governance ratings went out of the window, some follow up demands from investor activists were also eliminated. One of these was a demand that only companies with good governance ratings be invited to prestigious committees or made office bearers of industry associations.
All this only goes to show that the report is about what is doable and acceptable to the widest cross-section of people connected with business and industry. Let me conclude by saying – don’t worry. Indian business has a long way to go before it needs to worry about becoming ‘holier’ than other developed countries.
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