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A viable alternative to Clause 49
May, 10th 2007
With Clause 49 difficult to implement, there is a need to think up a practical substitute.

The present model of corporate governance has failed to take off. It is so structured that it can never be successfully implemented. It has its roots in the UK Report of Cadbury Committee. Several committees in India came out with varied suggestions more or less within the framework of reconstituting the board of directors with different subcommittees within the board to discharge various obligations.

What was and is intriguing is that the MCA (Ministry of Company Affairs), which is the administrator of the Companies Act (the Act) and SEBI, a market watchdog whose prime duty is to protect the interest of the investors and promote the capital market, has acted on codes that are inconsistent.

Moreover, Clause 49 of SEBI is applicable to all listed public companies and Section 292A of Companies Act is applicable to all public companies. The one common object, however, was that shareholder value must be optimised. The regulator has overlooked the fact that the system was oppressive, in that it cut at the root of the freedom to run the company the way the owners (shareholders) want, without being unduly interfered with. Regulators have also overlooked that so-called non-executive independent directors who are outsiders and do not have any stake in the company. To the extent they depend upon voting power of the shareholders (owners), they can never be independent. Therefore, an alternative is to be thought of. The following paragraphs deal with the alternative.

PRESENT FIASCO

In its present form, corporate governance, vide Clause 49 of the Listing Agreement applicable to all listed public companies, which was mandated couple of years ago, has been slowed by many roadblocks, as is evident from poor compliance. It has been reported that as of April 1, of the director database covering 2,447 of the 4,781 BSE-listed companies where investor interest is maximum, so far only 1,928 listed companies have filed information about their compliance with Clause 49. The report further reveals that 30 per cent of the listed companies have designated the promoters as non-executive chairmen and appointed their relatives, outside the meaning of the term "relatives", as chairmen. There is a difference in regulatory requirement within the definition of Companies Act, which applies to all public companies one-third of the total number of directors should be independent directors and under Clause 49 where there is an executive chairman, 50 per cent of the board should consist of `independent directors'.

The definition of the term `independent' is rigorous. Independent directors do not enjoy any immunity and can be visited by various criminal offences where directors can be held liable. Thus it will not be possible to get a really qualified, competent person as an `independent' director. It would, therefore, be prudent to think of a credible and viable alternative for corporate governance.

Corporate management will consist of two tiers. Tier one will comprise a board of directors appointed by the shareholders on the basis of recommendations made by the promoter/directors, and will be the decision-making and policymaking body.

CORPORATE MANAGEMENT

From among them, one or more would be appointed as executive director/managing director enjoying such powers as are entrusted to them by the board, contract of employment or, better still, a provision made in the articles of association (AoA) detailing the duties and responsibilities of the executive directors.

Among them also will be the representative appointed by the small shareholders as per the proviso to Section 252 of the Act and the nominees of the lending financial institutions, including debenture-holders.

Tier II will be a professional panel comprising: i) executives with expertise in accounting or company secretaries with financial acumen; ii) an expert possessing technical knowledge on industry-specific issues; iii) a human relations exponent with personnel and administrative experience; and iv) a legal luminary to ensure compliance with all industry-related regulations.

The panel members will be hand-picked by the board and their appointments will be subject to the approval of the shareholders at a general meeting. This will be called the Corporate Overview Team (COT). The terms of reference to this team will also be decided by the board.

The chairman of the team shall attend all annual general meetings. The board shall provide adequate space for office and infrastructure facilities and staff to discharge their duty.

If any of the members of the board of directors has the skill and expertise to discharge the functions of the team enumerated hereunder, such a director can also be appointed as a member of the team, subject however that he shall be paid additional remuneration for duties so performed.

N. R. Moorthy
(The author is a Pune-based company secretary.)

 
 
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