Will Separating India Inc's Owners From Management Ensure Better Corporate Governance?

Rules can command listed companies and market participants to fall in line. But true corporate governance can only happen if it comes from within.

A fresh controversy has engulfed India Inc. This time, the debate surrounds a Securities and Exchange Board of India missive on splitting the ‘CMD’ (chairman-cum-managing director) post in listed companies.

Though the SEBI fiat formed a part of fresh corporate governance guidelines issued by the market regulator some time in May 2018, the voice of opposition to the move has begun to acquire stridency as the deadline for its implementation (April 2020) is fast approaching.

Splitting the CMD post is among myriad directives issued by the market regulator in the wake of recommendations by an Uday Kotak-led committee on corporate governance.

In India, most companies have an integrated post of Chairman and Managing Director/CEO. This, the Kotak committee felt, has resulted in the disappearance of the crucial line that divides a company’s board and its management.

Under the new norms, the top 500 listed entities will have to ensure that the chairperson is a non-executive director and not related to the MD from April 1, 2020.

The ostensible logic for splitting the CMD post is to ensure that the two positions aren’t filled by members of the same promoter family and thus usher in a sense of true professionalism in the conduct of the company’s affairs.

Also read: What Kind of Exam Should India Inc’s Independent Directors Be Taking?

Two iconic names in the Indian corporate world – Venu Srinivasan of the TVS Group and Rahul Bajaj of the Bajaj family – have come out strongly against the proposal. Both have argued that the Indian context does not warrant any imposition of what they perceive to be a Western idea.

How should one view this line of argument? Whether one accepts it or not, most listed entities in India have identifiable owners. Often times, this identified ownership is held responsible for any good, bad or ugly thing that happens to the company. There are many instances where promoters were made to pay for the misadventures of the so-called professional managers in the system.

Notwithstanding regulator-induced strict governance rules, corporate mishaps have also occurred in the absence of a statesman-like father figure (a tall promoter, in this instance) who could be looked upon to have civilising influence across a corporate entity. Who can forget the infamous Satyam affair? In the end, this once iconic IT company proved to be an anti-thesis of satyam. In the end, everybody – insider, outsider, related and unrelated players – all conspired to bring it down collectively.

Satyam, in a way, is a reflection of a larger malice in the system, the degeneration of value system both at the individual and collective level. Read against this eroding value ecosystem, tough rules from SEBI are indeed inevitable.

What should be kept in mind is that if rules are framed by smart regulators, there are smarter players  to get around them. For instance, SEBI has also made it mandatory for listed entities to have six independent directors, including a woman director, on their boards. But how independent are these directors? The regulator may seek to define the duties of an independent director and even try to prescribe her qualifications. But in reality, they are appointed by the company, nay the owners. Is it possible that a loyalist be independent? Ideally yes, if she is loyal to the organisation and cares for its growth, but more often than not it does not play out this way.

Also read: India Inc’s Scandals Can Only be Staunched by Urgent Institutional Investor Engagement

There are also instances where companies don’t have a regular chairman. Of course, a company’s board requires a chairman to preside over its meetings but more often than not, they merely find the senior-most director to head the proceedings of their meetings!

The SEBI ruling, nevertheless, could rightly inconvenience many enterprises which have one too many active participants from the promoter-family. Consider the full-blown theatre of absurd enacted by a founder-shareholder of Infosys in the not-so-distant past, resulting in the ouster of an independent chairman and CEO. As the entire episode played out in the open market, the issue of corporate governance receded comfortably into the background.

Indeed, conflict of interest as it pertains to the role of a company’s board and its management is more a moral question. It requires a value-based mindset to carefully navigate the conflict zone.

It is also a bit ironic that SEBI is seeking to implement a crucial recommendation of a committee led by Uday Kotak, considering that Kotak Mahindra Bank Ltd itself has been in the eye of a storm over the manner in which it had sought to bring down the promoters’ holding as mandated by the Reserve Bank of India. The bank had moved the court against the banking regulator, which had declined to approve its move to issue preference shares to dilute the shareholding of its promoters.

“The reliefs sought in the petition, if granted, shall result in making inroads into the autonomy of the RBI and permit the petitioner and others to become regulators of their own selves,” the apex bank had said in its petition. The central bank has been in tussle with Uday Kotak since 2014 when he failed to meet the first milestone to reduce his stake in the bank. The RBI has been trying to separate the management and ownership functions at the nation’s lenders to improve corporate governance.

What this says is that good governance, be it at the corporate or political level, is all about the right attitude and maintaining a personal value system. Rules can command listed companies and market participants to fall in line. But true enforcement has to happen from within. In the unfolding rule-based environment, governance issues demand much of the management’s time and bandwidth. In the bargain, the business focus gets secondary attention, it appears.

K.T. Jagannathan is a senior business journalist.