The ministry of corporate affairs has put up a report prepared by the Institute of Company Secretaries of India (ICSI) on proposed changes to corporate governance norms. An earlier report was prepared by the Confederation of Indian Industry (CII) task force on corporate governance. The government plans to take a consolidated view on these recommendations, which is likely to result in amendments to existing regulations. The Sebi (Securities and Exchange Board of India) Committee on Disclosures and Accounting Standards (SCODA) also considered some of these issues, which it put up in a discussion paper in September.
Auditors and directors are under scrutiny after the Satyam scam. Not surprisingly, most of the proposals in these reports pertain to them. On auditors, the ICSI report recommends a mandatory rotation of audit firms after six years. This is most likely to be opposed by companies. The CII report had instead suggested that audit partners be rotated every six years, and if the experiment does not prove successful, then auditors can be rotated every nine years.
SCODA dropped the idea of rotating auditors and said that the audit partner who signs the financial statements could be changed every five years. Apart from a fixed tenure, SCODA had recommended that the audit committee should ensure independence of the firm and its partners.
But the real test will come in making changes that will affect directors, given their collective lobbying power. One of the crucial changes recommended by the ICSI report is a splitting of the roles of the chairman and CEO/managing director. The CII report agreed with this issue in principle, but recommended that it be done where possible. Even if the roles are split, in promoter-managed companies, if the chairman and CEO are relatives, then the purpose is defeated.
The ICSI report has mandated a maximum tenure of six years for independent directors. The underlying logic is to ensure they don’t get too comfortable with the management and provide fresh thinking on the board. The report also asks for the listing agreement to be amended to specify attributes that independent directors must possess and also stresses on their ability to understand financial statements. The CII report instead asks companies to have a well-functioning nomination committee for the selection of independent auditors. It also recommends a formal appointment process that outlines their roles and responsibilities. Independent directors are likely to find that being on company boards may involve more effort than at present.
There are more recommendations in these reports on issues such as director remuneration, nominee directors not being considered independent, restrictions on number of board positions, role of the audit committee and self-evaluation by the board.
All of them make sense if implemented in spirit and letter. But corporate governance among listed companies is seen more as an exercise in compliance, filling up forms and preparing a report that reveals very little to shareholders. Till investors punish companies that have a poor corporate governance track record, this may be another pointless exercise.
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