MY COMMENTS ON CORPORATE GOVERNANCE FRAMEWORK PROPOSED BY SEBI

(UPDATE: on 30^th August 2013: Companies Bill became the Companies Act, 2013 (Act 18 of 2013).

I have mailed my comments on corporate governance framework proposed by SEBI in “Consultative Paper on Review of Corporate Governance Norms in India” and SEBI has acknowledged the receipt. You can read summary of this framework at my earlier blog here if not already read it.  Now, I am producing a copy my comments as my initiative towards healthy debate, here:

I am writing to submit my comments and suggestions on above captioned subject. Before writing my comments Pera wise. I submit following:

Independent directors are being considered as key element for success of all Corporate Governance practices. Independent Directors are also human being and have all even and odds alike. Before emergence of concept of “Independent Directors”, we had and still have concept of Auditors and with time there are some additions to genre of auditors in form cost auditors, management auditors and secretarial auditors. Auditors were supposed to be independent from influence of management or controlling persons. They usually appointed by and report to shareholders. Had this institution of auditors be succeed in its duties and win investors confidence, there may not be any need of present concept of “Corporate Governance” and “Independent Directors”. Even these days, auditors have better resources to find out any malpractices, fraud and misrepresentations by companies. Auditors are still relevant, but we should emphasis on “independent Auditors”, appointment of auditors, their reporting methodologies. Independence of auditors is first step for corporate governance as on the basis of their report independent director may question rest of the Board.

With this note, I now, submits my para wise comments and suggestions:

1. Small shareholders’ director is a good suggestion. However, in case of listed companies, many small shareholders are not long term investors and not interested in long term well being of company and other stakeholders.

Further, there is one other issue that some persons have one or two shares of many companies of particular geographic area. These so called shareholders become very active and start calling management for blackmailing them. They threat havoc at general meeting.

It would be better, instead of small shareholders’ directors; we define small investors and appoint small investors’ directors.

1. Cumulative voting should be compulsory in top tire of companies, this ensure more investor participation in decision making process. All directors may know investor perception about their performance and create a kind of rating for them. Most popular director will be elected first. Further this may reduce sense of seniority, etc. among some directors.
2. No further comment/ Suggestion.
3. Certification course for directors is certainly a good idea. However, I want to point out that one can train managers how to manage but not leaders how to lead. Yes, one can give them some refresher course for up gradation of knowledge and introducing them with new social, legal, financial, technological, and other developments.  This must be option more of directors, how to update them; not solely of the companies. Otherwise, companies will create their own class of director to restrict entry of outsiders as independent directors; like one company may always prefer IIMC trained directors.
4. Treatment of nominee director as non – independent director is good.
5. There must be some reasonable minimum or maximum age for independent directors and any exception must be clarified in board report. I suggest 25 as minimum age but not less than 5 years of experience. Maximum age must be 70 with exception in deserving cases. However, even in these cases number of directorship must be further limited to align their physical ability.
6. No Suggestion/ Comment.
7. Independent directors must make public their overall performance to general public on annual basis, for each company to its shareholders and general assessment for all companies to data bank as mentioned in Para 11.1 of recommendation. All resignation citing personal reason, health reason and all such which may affect performance of director in all other companies, from where, he choose not to resign, must be reported distinctly.
8. No Suggestion/ Comment.

10. Performance evaluation of independent director in respect of individual company may be done by entire board of directors. Performance of an independent may differ from company to company due to various factors. However, overall performance of an independent directors also matters, particularly when we are going to institutionalize independent director by creating a data bank as mentioned in Para 11.1. I suggest that all performance reports of independent directors for all his directorships should be reported to data bank and made public. This will make institution of Independent Director more transparent and responsible.
11. Lead independent director will become very responsible position with time. In case, a person becomes Lead Independent Director in more than a reasonable number of companies, it may affect his attitude and performance. We may refer to para 11.13, which mention that Proposed Companies Bill Act propose to restrict number of directorship of a person to 10 and voluntary guidelines issued by MCA limit number of directorship to seven. I suggest restricting number of position of lead independent director of a person to 2 (two).
12. No comment/ suggestion.

1. 13.  No comment/ suggestion.

14. No comment/ suggestion.
15. This is good to have diversity of background and gender on Board of Director. It should not hamper talent and experience. I suggest, we should ensure there should be no discrimination on the basis of gender, birth, religion, region etc. There should not be any reservation on any basis even for one seat. Any reservation will create ornamental positions on board without any actual contribution. I suggest that we should ensure that persons of divergent backgrounds may come forward to register themselves in the data bank as proposed in Para 11.1. Separately, Government may ensure that person of divergent background should come forward with new business ideas and start new companies.
16. No comment/ suggestion.
17. No comment/ suggestion.
18. No comment/ suggestion.
19. No comment/ suggestion.
20. No comment/ suggestion.
21. No comment/ suggestion.
22. No comment/ suggestion.
23. No comment/ suggestion.
24. I support that E – voting facility should be made compulsory for all resolutions to be passed in general meeting.  But only wider participation in voting may not make a system more democratic. The essence of democracy certainly is wider participation in discussion and sharing knowledge, experience, ideas, point – of – views, and debate. I propose, some E – meeting facility for listed companies. Any registered member of company may post his views for debate created resolution wise from circulation of Notice and Annual Report till initiation of actual E – voting as proposed.
25. No comment/ suggestion.
26. No comment/ suggestion.
27. No comment/ suggestion.
28. No comment/ suggestion.
29. No comment/ suggestion.
30. No comment/ suggestion.
31. It is proposed that the company should obtain a certificate from either the auditor or practicing company secretary regarding compliance with all clauses of Clauses 49 and annex the certificate with the directors’ report. I suggest that auditor of the company be appointed for financial matters and have no competence regarding legal and governance issues. This certificate should be issued by Company Secretary in employment of that company and certificated by Secretarial auditor or company secretary in practice. Both of them should be made responsible for any false statement therein.

These ware my comment on corporate governance framework proposed in “Consultative Paper on Review of Corporate Governance Norms in India”.

Please note blog post is not a professional advice but general information about the subject covered here. In case, you have specific query, please seek professional advice or contact author.

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