How I looked at it…!

In the backdrop of recent corporate battles, the Uday Kotak led SEBI committee on corporate governance should be a game changer. Several newspapers termed this as Swach Corporate Abhiyaan which simply means Clean Corporation Program and rightly so as the committee has recommended some important improvements in the current governance structure, such as:

  1. Segregation of persons acting as chairman, MD and CEO of listed companies
  2. It should be mandatory for top 500 companies by market capitalization to undertake D&O insurance for its independent directors. D&O Insurance stands for Directors and Officers insurance
  3. Minimum of 6 directors to be on board of listed entities and every listed entity to have at least 1 independent woman director
  4. More transparency on appointment of independent directors and wants them to play a more active role
  5. Maximum number of listed entity directorship to be reduced to 8 and at least half of every listed entities board to have independent directors
  6. Audit Committee must review use of loans / advances / investment by holding company over INR 100 crore
  7. Application to fill a casual vacancy of office of any independent director must be approved by shareholders
  8. Minimum number of Audit Committee meetings be increased to five every year
  9. No person to be appointed as alternate director for an independent director of a listed company
  10. A formal induction should be mandatory for every new independent director appointed to the board
  11. Board of Directors to be updated on regulatory & compliance changes at least once a year and as well as an interaction between non-executive directors & senior management

It can now be sensed that the importance of compliance and regulatory requirements is significantly increasing as the board of directors will have to meet at least once in a year exclusively to discuss matters connected to regulatory and compliance requirements. Currently board of directors during the quarterly meetings are informed about the current status of compliance however during such meetings usually it is seen that the quarterly results are widely discussed on priority and compliance related matters are sidelined or at times have passing references.

Further, this requirement also includes Succession planning and Risk management i.e., effectively Board needs to fulfill its corporate governance related responsibilities such as the identification, evaluation and mitigation of strategic, operational and catastrophic risks. Also the key provision to make auditors accountable along with the board of directors is introduced in the committee report, where SEBI will have the right to pull up the auditors for any lapses in corporate governance norms and penalize them for any misconduct in the professional duties.

According to me, auditors will include both external (statutory auditors) and internal auditors as at times it is seen that the external auditors rely upon the wisdom of internal audit methodologies.

Considering the above complexities and ever increasing responsibilities it can be analyzed as to why certain provisions like separation of chairman, MD and CEO, restriction on directorships in listed companies and mandatory induction program to the independent directors are propounded in the committee report. The committee expects the board to focus on the platter currently available to them and not to act as directors in multiple listed companies. Unfortunately The Companies Act, 2013 promotes an individual to be an independent director who knows nothing about the business and market challenges as he is essentially a non related person to the board, vendor or customer. However committee report suggests now to train such individuals about his/her roles and responsibilities in the company before such appointment.

Learning culture henceforth will not only be restricted to the employees of the company but it now extends to the board of directors.

Interestingly to keep and promote the thoughts on corporate governance and to demonstrate the same Mr. Uday Kotak himself is restructuring his shareholding by reducing his stake in the bank to below 30% and comply with the Reserve Bank of India (RBI) directions.

I personally believe the assurance services rendered by leading consulting firms will see a good prospect typically in the field of compliance automation and effective implementation of internal financial controls. The Companies Act, 2013 and SEBI together is creating a controlled environment around the industries in India similar to Sarbanes-Oxley Act of 2002 in USA, which helps stakeholders to rely more on the wisdom of the board of directors.

After all, governance is nothing but a theory propounded to secure the interest of stakeholders.