Sucheta Dalal :Utopian Governance Code
Sucheta Dalal

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Utopian Governance Code  

January 27, 2010

“Birds do not build nests on a tree that does not bear fruits,” quotes corporate affairs minister, Salman Khurshid, from Chanakya’s Arthashastra to express his hope that corporate India will ‘generously adopt’ a brand new ‘voluntary’ code of corporate governance released in December 2009. The response from media was scanty and corporate India maintained a thundering silence. Later, the minister told a newspaper that his ministry would watch for six months and may consider making the code mandatory.

This response, compared with the vociferous opposition to the N Narayana Murthy Committee’s recommendations, is quite startling, especially since many of the new ideas are far tougher than those proposed by the SEBI committee and later diluted. Probably, chastened by the enormity of the Satyam fraud, and the reputations it tarnished, corporate India prefers to keep quiet. Or maybe, the protests will start when the code is sought to be made mandatory. Let me start with the recommendations that are likely to be least acceptable. 

First, the number of companies on which one can be an independent director has progressively dropped from 20 to 15; under the new code it will be reduced to seven listed companies and 10 overall. This is a good move, because the role of independent directors has expanded, so has the compensation. However, it is bound to draw the usual complaint that there aren’t enough worthy people to fill up board slots.

Another recommendation is that an independent director can have only two consecutive tenures of six years each, after which there must be a three-year cooling period during which s/he cannot have any relationship with the company and cannot be inducted in an advisory or consulting capacity or even as an employee. A director can be re-appointed after this cooling period, but only for another three-year term. That is because the code also says that a person can be an independent director with a company for a maximum of nine years. When the Narayana Murthy Committee had proposed that an independent director should have a maximum of three terms of three years each, it led to a furore and even the best-managed companies objected emphatically.

One would see an overhaul of the corporate boards of even the largest companies if the six-year or even the nine-year criteria were to be applied along with the rule of seven directorships. Many companies are confident that the code can apply prospectively and no change is required for another six years, but the quiet lobbying and jostling for directorships has already begun.

The code has a bunch of utopian requirements regarding the ‘positive attributes’ of independent directors, training and induction and skill enhancement programmes and, finally, an annual performance evaluation which has to be ‘formal and rigorous’. All of this makes sense for employee-directors and will, hopefully, not apply to independent directors, because it makes nonsense of the very basis of their selection. A director should only be selected if s/he is qualified and experienced; publishing their attendance record in annual reports is a positive move but a performance evaluation is bound to be farcical.
Another idea that would be followed only in form is the directors’ responsibility statement and the corporate compliance committee. If the new code is rigidly followed, an independent director will have to virtually become an employee director without being on the payroll. The code specifies that they will have office space and are expected to demand information.

The responsibilities prescribed are so detailed and onerous and their power to meddle so great, as to be unfeasible. The code will keep good people away from many directorships and also make companies wary about whom they appoint. Frankly, it is not clear how a code so impractical can further the cause of good governance or protect investors.

Sucheta Dalal is the Consulting Editor of Moneylife. Subscribers get free help in resolving their problems with select providers of financial services. She can be reached at suchetadalal

-- Sucheta Dalal