Let’s get real about promoter control of companies

But then, does that give them a licence to run their entities, even after listing, like personal fiefdoms? Isn’t it time for the Securities and Exchange Board of India (Sebi) to regulate firms with high promoter stakes a little differently ?

What’s the role of a company’s promoter? Is this person expected to work primarily for the benefit of other shareholders? Just as I am often posed this question, I am sure other advisors are also asked: How do promoters protect their own interests too?

In India, promoters retaining large stakes goes back to historical trust deficits between them and governmental authorities. As businesses were often portrayed in negative terms in socialist times, capitalists sought to protect their interests by maintaining substantial ownership, often obscured through friends and trusts holding larger stakes than reflected in official records. This helped secure companies from takeover attempts and keep disruptive dissent at bay.

Compounding this scenario is the evolution of corporate governance rules in India, at least in the decades since economic liberalization, largely influenced by industrialists who chaired regulatory advice panels set up by regulators. 

Consequently, there exists palpable reluctance within industry to subject itself to more scrutiny. This resistance is evident in the reluctance to separate the roles of chairperson and CEO, a move viewed as diluting the authority and influence traditionally wielded by promoters.

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While promoters will want to safeguard their autonomy and control, regulators must balance it with minority-shareholder rights. Sebi could contemplate a regulatory threshold similar to that of the US. A company whose promoter has more than half its voting power and is listed on the NYSE or Nasdaq may invoke a ‘controlled company’ exemption to avoid meeting some standards, including the need for its board to have a majority of independent directors. 

Now, ‘independent director’ appointments in India rarely happen without the approval of promoters; in fact, they are often handpicked. Rather than maintaining a pretence on this norm, why not have a realistic carve-out for firms with large promoter stakes?

The audit committee reports its findings to the board, which may have a view of its own; it can even overrule the audit panel findings. It’s all about board composition. But in the US, under the Sarbanes-Oxley Act, the audit committee reports directly to the regulator, rather than the board. If India adopts a category of ‘controlled entities,’ financial reporting rules would have to tighten.

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Empowering minority shareholders and strengthening their board representation can be achieved through regulatory reforms aimed at enhancing shareholder democracy and participation. We could mandate minimum thresholds for minority representation on boards to grant minority owners a voice in key decisions. 

Moreover, implementing proxy-access provisions would enable minority shareholders to nominate candidates for board positions directly, providing them with a more active role in shaping corporate governance practices.

We must not, however, deviate from the fundamental tenet of voting rights accorded in proportion to ownership stakes. This is why some of the ideas that are floating around, such as endowing independent directors with controlling powers even when external investors hold less than 20%, need to be rejected. We must not weaken the foundational principles of corporate ownership or disrupt the basic governance structure. 

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By granting disproportionate control to independent directors, the governance framework would risk marginalizing the interests of external investors who may hold significant equity but lack the weight to influence corporate decisions. Such an imbalance would undermine the democratic principles of corporate governance, where shareholder rights should be aligned with their ownership stakes to ensure that decision-making processes are fair and transparent.

To address this challenge, regulators should revisit the criteria for appointing independent directors and ensure that their roles are clearly defined and aligned with the principles of shareholder democracy. For equitable governance, we need safeguards to prevent concentration of power among independent directors and also need to promote greater shareholder participation in the selection process.

It wouldn’t surprise me if regulators and executive search firms still have a list of 250 independent director candidates who are already on multiple boards and in demand for their ability to ‘balance’ the interests of promoters and other shareholders. Sebi too should aim for a value-enhancing balance between investor protection and the autonomy of promoters with large stakes.