Splitting CEO & MD roles may ultimately apply to all companies: M Damodaran
ET Now|
Updated: Oct 07, 2017, 10.17 AM IST
Talking to ET Now, M Damodaran , Former Chairman, SEBI , asks “do you think a friend who is a non-family member is likely to be more independent though by definition he is so?
Edited excerpts :
One important recommendation of the committee is to split the post of chairman and CEO and MD in those companies where there is a 40% public shareholding. There are many such companies in the Nifty 50, at least six of them I can remember – RIL, Hero MotoCorp. So, it is going to impact a fair number of listed companies. What do you think is the intention of the panel when it comes to this particular recommendation and what are they trying to avoid? Conflict of interest is an aspect but in your opinion what is the larger objective?
It is about the board structure. It goes to the basic principles of governance. The board is to hold the management accountable and therefore if the same person is heading both board and management, in some sense it dilutes the accountability principle. I had said this before that combining these two positions in the same individual is the ultimate negation of corporate governance and I am delighted to see that the committee actually moved this from what was earlier a non-mandatory provision to a mandatory provision. Of course, a limited universe to start with, but going forward they will cover all the companies.
Quick thoughts on a very important category of stakeholders when it comes to corporate governance framework – the independent directors. One recommendation says at least half of the board of every listed company should be independent and secondly maybe they want an entire concept of resigning on personal grounds to go because now they are saying that you will have to mandatorily disclose the detailed reasons behind an independent director resigning – a) to the stock exchanges and b) in the governance report. Currently, you just have an obligation to tell the registrar. How far do you think this will go and improve the corporate governance standards?
Currently, you have an obligation to disclose the correct reason to the registrar. Are the correct reasons being disclosed? I am not so sure. What is the guarantee that just because you have to now disclose it additionally to the shareholders and state this in the report, you will get the correct reasons disclosed? It is a good thing. The pointer is right. The real issue is – will this translate honesty? The problem with all of this is you cannot legislate for honesty, for integrity, for independence. These are attributes of mind and heart. Take independence for example, they have tinkered with the definition of independent director. I would have liked to see them go the way of the South Africans where the definition is very simple. It says that the absence of a material relationship makes you independent. Now a relationship might be material in terms of a family relationship, in terms of financial transaction relationship, but that is all you need to say. You do not have to list out somebody’s family tree see whether the second cousin is independent or non-independent.
When people that are completely unrelated by blunt eyes might be the ones who will actually act along with each other like if you are old friends. Do you think a friend who is a non-family member is likely to be more independent though by definition he is so? The real issue is bring the right people on board, it is not about numbers. You can get 50% on the board. If they all go to sleep, nothing will happen. Get one good independent director on the board and then see the action will be completely different. Do not leave this to legislation. Let shareholders question the kind of people who are coming on the boards to see whether these people measure up.
The issue of compensation has been a rather controversial topic in recent times, especially keeping in mind whatever was raised in terms of concerns at Infosys. What they have proposed is that executive promoter, director salaries in cases where the salary is in access of Rs 5 crore or 2.5% of the net profits -- whichever is higher -- mandatorily a special resolution needing shareholder approval is required. Top brass salaries have been a bone of contention in the past. What do you think this proposal will achieve?
Executive compensation was a problem in the US some years ago. It is a problem in India and other jurisdictions and all that the committee has recommended and rightly so is go to the shareholders and get approval. Get a special resolution if it exceeds certain thresholds. You might quarrel with the numbers, should it be 2.5%, should it be Rs 5 crore, should you not move it to Rs 10 crore in the first instance? You could quarrel with numbers. Wherever you draw a line there would be somebody that is uncomfortable. But when you say go to the shareholders, have a legitimate explanation and no sensible shareholder will vote that down.
Every time the government comes out with a new policy, a committee is set up, their recommendations are taken on board, stakeholders comments are invited and then finally the regulator makes the law of the land. But at the end of the day, does it all boil down to compliance? Do you see a compliance issue in terms of some of these recommendations if they are accepted in their entirety?
If they are accepted as it is most if not all companies will comply, does that mean they will practice governance, I am not so sure. For example, you ask audit committees to look at a 100 things, they will. The minutes of the meeting will show you that they have looked at 100 things. But have they actually looked at it? I do not know. Do NRCs, for example, honestly look at what the board needs, identify the kind of vacancies that need to be filled and then in terms of skill sets, experience, expertise, get the right kind of universe or do they go through the motions which seem to comply?
Take board evaluation, for example, a very laudable initiative in the Companies Act. Of course, they went into needless detail and spoiled the whole thing but how has it been implemented by the companies? Administer questions to some directors, get them all to give 4.9 because you do not give 5/5, every director gets 4.9 and then see whether the board is performing, it is not performing but every director is 4.9/5. You know this kind of jokes have to stop, you need to get robust evaluation processes leading to the right solutions.
Edited excerpts :
One important recommendation of the committee is to split the post of chairman and CEO and MD in those companies where there is a 40% public shareholding. There are many such companies in the Nifty 50, at least six of them I can remember – RIL, Hero MotoCorp. So, it is going to impact a fair number of listed companies. What do you think is the intention of the panel when it comes to this particular recommendation and what are they trying to avoid? Conflict of interest is an aspect but in your opinion what is the larger objective?
It is about the board structure. It goes to the basic principles of governance. The board is to hold the management accountable and therefore if the same person is heading both board and management, in some sense it dilutes the accountability principle. I had said this before that combining these two positions in the same individual is the ultimate negation of corporate governance and I am delighted to see that the committee actually moved this from what was earlier a non-mandatory provision to a mandatory provision. Of course, a limited universe to start with, but going forward they will cover all the companies.
Quick thoughts on a very important category of stakeholders when it comes to corporate governance framework – the independent directors. One recommendation says at least half of the board of every listed company should be independent and secondly maybe they want an entire concept of resigning on personal grounds to go because now they are saying that you will have to mandatorily disclose the detailed reasons behind an independent director resigning – a) to the stock exchanges and b) in the governance report. Currently, you just have an obligation to tell the registrar. How far do you think this will go and improve the corporate governance standards?
Currently, you have an obligation to disclose the correct reason to the registrar. Are the correct reasons being disclosed? I am not so sure. What is the guarantee that just because you have to now disclose it additionally to the shareholders and state this in the report, you will get the correct reasons disclosed? It is a good thing. The pointer is right. The real issue is – will this translate honesty? The problem with all of this is you cannot legislate for honesty, for integrity, for independence. These are attributes of mind and heart. Take independence for example, they have tinkered with the definition of independent director. I would have liked to see them go the way of the South Africans where the definition is very simple. It says that the absence of a material relationship makes you independent. Now a relationship might be material in terms of a family relationship, in terms of financial transaction relationship, but that is all you need to say. You do not have to list out somebody’s family tree see whether the second cousin is independent or non-independent.
When people that are completely unrelated by blunt eyes might be the ones who will actually act along with each other like if you are old friends. Do you think a friend who is a non-family member is likely to be more independent though by definition he is so? The real issue is bring the right people on board, it is not about numbers. You can get 50% on the board. If they all go to sleep, nothing will happen. Get one good independent director on the board and then see the action will be completely different. Do not leave this to legislation. Let shareholders question the kind of people who are coming on the boards to see whether these people measure up.
The issue of compensation has been a rather controversial topic in recent times, especially keeping in mind whatever was raised in terms of concerns at Infosys. What they have proposed is that executive promoter, director salaries in cases where the salary is in access of Rs 5 crore or 2.5% of the net profits -- whichever is higher -- mandatorily a special resolution needing shareholder approval is required. Top brass salaries have been a bone of contention in the past. What do you think this proposal will achieve?
Executive compensation was a problem in the US some years ago. It is a problem in India and other jurisdictions and all that the committee has recommended and rightly so is go to the shareholders and get approval. Get a special resolution if it exceeds certain thresholds. You might quarrel with the numbers, should it be 2.5%, should it be Rs 5 crore, should you not move it to Rs 10 crore in the first instance? You could quarrel with numbers. Wherever you draw a line there would be somebody that is uncomfortable. But when you say go to the shareholders, have a legitimate explanation and no sensible shareholder will vote that down.
Every time the government comes out with a new policy, a committee is set up, their recommendations are taken on board, stakeholders comments are invited and then finally the regulator makes the law of the land. But at the end of the day, does it all boil down to compliance? Do you see a compliance issue in terms of some of these recommendations if they are accepted in their entirety?
If they are accepted as it is most if not all companies will comply, does that mean they will practice governance, I am not so sure. For example, you ask audit committees to look at a 100 things, they will. The minutes of the meeting will show you that they have looked at 100 things. But have they actually looked at it? I do not know. Do NRCs, for example, honestly look at what the board needs, identify the kind of vacancies that need to be filled and then in terms of skill sets, experience, expertise, get the right kind of universe or do they go through the motions which seem to comply?
Take board evaluation, for example, a very laudable initiative in the Companies Act. Of course, they went into needless detail and spoiled the whole thing but how has it been implemented by the companies? Administer questions to some directors, get them all to give 4.9 because you do not give 5/5, every director gets 4.9 and then see whether the board is performing, it is not performing but every director is 4.9/5. You know this kind of jokes have to stop, you need to get robust evaluation processes leading to the right solutions.
