Corporate Governance

The Indian Companies Act 2013, the consequence of wanting to prevent recurrence of Satyam Computers kind of scams was recently put to test under the most unexpected of circumstances. On 24 October 2016, Tata Sons announced the removal of its chairman Cyrus Mistry. The House of Tatas, an iconic salt-to-software global conglomerate was suddenly at the epicentre of a controversy around an alleged breach of corporate governance. Neither the demonetisation of 500 and 1000 Rupee currency notes, nor the Trump election news that followed could mute the resulting debate. No one would have suspected Tata Group, a global brand known for its enlightened management, to be caught up in a potential governance breach.

Second shocker

Surprisingly enough, the next governance controversy turned out to be Infosys, a homegrown international IT brand known for its high standards of corporate governance. The founder and erstwhile chairman, NR Narayana Murthy’s outburst over the “drop in corporate governance standards at Infosys” stirred up the business media. CEO compensation, severance and share buyback, in particular, were at the heart of his concerns.

Let us look at the issues triggered by the Tata and Infosys affairs: the evaluation of company boards, board diversity, disclosures, the role of independent directors, the protection of minority shareholder interests by shareholder activists, the removal of independent directors only by means of a special resolution; quantifying governance practice and performance through measurement and metrics; insider trading and related party transactions.

And at the crux of these issues is a potential trigger for a class action.

Physics and chemistry of governance

Both companies had a common underlying problem. Ratan Tata, who staged a temporary return as interim chairman of Tata Group, attributed the dismissal of Mistry to a “trust deficit” and “non-conformance with Tata Group values”. Likewise, Murthy considered the value of appointing past Infoscions schooled in “Infosys values” to the board.

If corporate governance is a science, the Companies Act represents physics and ought to be followed in letter and spirit. A second element is chemistry, of which company values form an essential component. Practicing governance by itself is not good enough. Management should not only demonstrate that the values are being followed, they should also communicate and engage with stakeholders.

Only time will tell whether there were real breaches at two of India Inc’s leading brands.

What does the future hold?

India, home to the oldest bourse in Asia (Bombay Stock Exchange) has the largest number of listed companies after the US. Not all boards of listed companies are covered by Directors and Officers insurance (it is not mandatory) and of those who do, the coverage is often inadequate.

The recent incidents should serve as a wakeup call: businesses, listed or otherwise should make sure they are adequately insured and should not ignore risk transfer.

Controversy at the two most venerable names prove there are no holy cows in corporate India. The growing vigilance of the stock market regulator (Securities & Exchange Board of India – SEBI), nascent shareholder activism and wary institutional investors should push transparency aspirations to new heights. That would translate into greater disclosure by boards, refrain from crony capitalism, prevention of related party transactions, responsible auditing, and promote socially responsible corporate behaviour and board gender diversity.

With the National Company Law Tribunal (NCLT) now functional, related appeals need not be stuck in the slow pace of judicial process. Having undergone the litmus test hopefully both the Tata and Infosys boards will raise their bar for the rest of corporate India to emulate.

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