Corporate Governance: Proposed Reforms – Part IV

[Dr. Sanjiv Agarwal]

Succession Planning

While succession planning is desirable in all family owned groups / companies, SEBI should also spell out role of institutional investors / shareholders in this, keeping in mind interests of all stakeholders.

Risk Management

Risk management committee should be made a voluntary board level committee and companies should have a board approved risk management policy in place.  The board has to be responsible for risk management including its mitigation.

 Audit Committee

Internal audit of should be reporting to CEO / COO but subject to review by the Audit Committee.  Moreover, independence and professional expertise of internal auditor should also be ensured.

 SEBI may consider having a separate code (like insider trading) for implementation of a proper and fool proof whistle-blower mechanism which may be overseen by the Audit Committee. In case of listed PSUs / PSBs / PSEs, it should be ensured that there is no clash or conflict of interest between the vigilance mechanism and whistle- blower mechanism.

 Remuneration Committee

Companies should have a board approved remuneration policy. SEBI may consider having one committee to take care of the tasks of remuneration committee and nomination committee. It can also deal with incentives, non- monetary consideration and top level promotions (i.e., one level below the board). Remuneration may also be linked to performance / absenteeism in board meetings.

 Shareholder Servicing

Stakeholder's relationship committee may be introduced which is a broader concept. Infact one designated committee is needed for safeguarding the interests of investors and shareholders. Such committee is also required to meet more often as compared to other committees. 'Stakeholder' needs to be defined -will it include only financial stakeholders (JVs, private equity, banks etc.) or all stakeholders ?

 Video Conferencing

SEBI may also cover in its Corporate Governance Code, participation in board / committee meetings by video conferencing.

 Related Party Transactions

Disclosure of related party transactions (RPT's) should be made subject to quarterly review and form part of quarterly results. If required, SEBI can seek amendment in AS-18 for continuous disclosures. Reporting requirements can be more stringent by way of 'flash disclosures'.

 Listed companies may be allowed to enter into agreements for granting superior affirmative rights subject to appropriate checks and balances on disclosures and oversight by Audit Committee of Board.

 Approval of material or major RPT's by majority of the minority may not be desirable keeping in mind the good Corporate Governance in sum and substance. Abusive RPT's per se are to be discourage and any attempt to get the same approved by the 'majority of the minority' will be a mockery. This is not a practical solution to get a 'managed approval'. The law ought to be respected.

 Pre approval of RPT's by Audit Committee and referring them for third party valuation is a welcome move but it may involve practical problems of holding Audit Committee meetings more frequently which may be a practical issue in terms of quorum, logistics etc. It is suggested that RPTs could also be classified as normal RPTs and extra ordinary RPTs. Only the later one could be subjected to pre approval of the audit committee of the Board.

 Further, approval could be obtained from Audit Committee or Risk Management Committee of the Board. Also, major RPT's ought to be spelt out.

 Proposal to consider mandating approval of disinterested or minority shareholders for managerial remuneration may not be practical as many of these may not even participate and it may lose the relevance of such approval. It would be desirable to obtain approval of all shareholders (of course excluding the interested ones). Instead, special resolution could be considered for all such cases without a threshold limit. The principle should remain the same, irrespective of the amount of remuneration involved.

 Scope of RPTs should cover the scope as per Ind –AS-24. Further, RPT's should be disclosed in terms of number of transactions, amount involved (break-up per category + aggregate) and percentage to total assets / net profit (loss).

 Accountability and responsibilities of controlling shareholders (other than promoters) should be fixed vis-à-vis other stakeholders. Their view point on policy issues such as dividend declaration, participation in meetings, interaction with management and decision making, participation in selection / election / nomination of directors, voting or proxy voting and investments should be clearly brought out and disclosed in the annual report / respective websites.

 Professionals

While private sector enforcement and voluntary self-regulation is desirable to be encouraged, as it would enhance the quality of Corporate Governance, there is a need to develop a cadre of Corporate Governance professionals and for this, SEBI could encourage / outsource /  financially assist objective efforts of institutes such as  NISM / IICG / ICSI / ICAI etc. These institutes should be used to propagate and advance the cause of Corporate Governance in not only India but in all Asian countries.

 SEBI may also consider empanelling professionals / professional firms qualified and engaged in the areas of Corporate Governance, who possess adequate applied skills for Corporate Governance implementation.

 Even listed companies can form a small group of interested and willing shareholders who can volunteer to the company for advancing such cases.

 

(To be continued………)