The many committees on corporate governance
It seems corporate governance and God have something in common. Both are remembered in times of crisis.
The first regulatory committee on the subject was formed in the days after the Asian financial crisis. In 1998, the Confederation of Indian Industry had set the ball rolling by publishing a ‘Desirable Code of Corporate Governance’. In the summer of 1999, the Securities and Exchange Board of India (Sebi, then under D R Mehta) formed a committee on the subject. Kumar Mangalam Birla, in his early 30s and a Sebi board member, led the panel of 18 people. It had representatives from the finance ministry, corporate affairs department, companies and the accounting and consulting professions.
The Birla committee suggested several mandatory and nonmandatory measures, giving shape to the first formal regulatory framework on the subject. By 2000, Sebi had put the basic structure in place. The famous Clause 49 in the listing agreement was born. Concepts such as audit committee, remuneration committee, a separate section in the annual report for corporate governance and the requirement of half the board to be comprised of independent directors were put forward by the Birla panel.
It said the listing agreement was not a powerful instrument to implement these provisions, as the penalties were not stringent and exchanges lacked sufficient powers. It suggested Sebi rectify these.
Soon, the department of corporate affairs set up its own committee on audit and governance, under former cabinet secretary Naresh Chandra. This committee looked at the unlisted space and broadly tried to build on the Birla recommendations. Its report came in 2002.
By then, the Enron scandal had broken out in the US, where the Sarbanes-Oxley Bill was enacted, taking investor protection provisions to levels not seen before. The Indian regulator was being asked tough questions on what it was going to do.
Infosys founder N R Narayana Murthy, also a member of the Birla committee, was asked to lead a new 23-member panel on corporate governance. “The many instances of corporate misdemeanours have also shifted the emphasis on compliance with substance, rather than form, and brought to sharper focus the need for intellectual honesty and integrity,” the Murthy panel would observe.
His panel made specific recommendations on the functioning of audit committees, refined the procedures on related party transactions and tried to define who could be an independent director, by trying to enlist relationships and transactions that would disqualify a person.
It also sought to bolster the whistleblower policy and wanted Sebi to make provisions for stringent disclosures in analyst reports. It also made a passing reference on the need for disclosures related to conflict of interest in media reports.
Ironically, when all these noble recommendations were being deliberated on, a certain Ramalinga Raju, promoter of Satyam Computer, had climbed on a tiger, which he did not know how to climb off. The ~8,000-crore Satyam Computer scandal hit the Street hard in early 2008. It was such a blow to the regulatory system that its effects are still felt on the various policy measures. It also heralded the birth of corporate governance firms, also known as proxy advisories.
The new Companies Act, that took effect in 2013, had several provisions with Satyam written all over it. Sebi raised the bar further in 2014 and has since given listing conditions a bite by bringing these under regulations.
Even these have since proved inadequate. And, a new committee has been formed. With a strength of 21, the new panel is smaller than Murthy’s but bigger than Birla’s. As the regulator has been taking a re-look every second year, it should perhaps consider having a standing committee on the subject, as it has for the primary market and the secondary market!
The Birla committee suggested several mandatory and non-mandatory measures, giving shape to the first formal regulatory framework on the subject