Majority of minority rule against corporate democracy?

In the annual general meeting (AGM) of ICICI Securities Limited (ISL), held on August 30, 2018, the shareholders elected Chanda Kochhar, the CEO and MD of ICICI Bank Limited (hereafter, bank), as a director. ISL is a listed subsidiary of the bank, which holds 79.22 per cent stake in the company. The Institutional holding (including mutual funds) in the company is 15.80 per cent and public (other than institutions) shareholding is 4.97 per cent. The bank nominated Kochhar and voted in favour of appointing her as a director of ISL. This has raised questions on the standard of corporate governance in the bank.

Kochhar is under investigation by several agencies — the Securities and Exchange Board of India (Sebi), the US markets regulator Securities and Exchange Commission (SEC) and the Central Bureau of Investigation (CBI). The board of directors of the bank has set up an independent enquiry by retired Justice B N Srikrishna against the alleged impropriety in granting a loan to the Videocon group.

Some proxy advisory firms advised the shareholders to vote against the resolution. The market reacted positively to the news that Kochhar had been elected as director. Shares of ISL climbed 4.52 per cent. It seems that the market’s perception of corporate governance issues does not resonate the proxy advisers’ perception.

The bank’s decision may be inferred as a show of its confidence on the leadership of Kochhar and it is in line with the bank’s board position of maintaining status quo until the wrongdoing is established. The board did not remove Kochhar from the position of CEO and MD and appointed Sandeep Bakshi as chief operating officer while advising Kochhar to go on leave to ensure fair investigation. Many corporate governance experts consider that the bank’s decision signals bad corporate governance in the bank. According to them as a good corporate governance practice, the bank should not have nominated Kochhar, who is under investigation, for appointment as director and the second best option for the bank was to abstain from voting. In other words, the bank could have applied the principles of the ‘majority of minority’ rule in this special situation.

It is widely accepted that the majority of minority rule should be applied in approving ‘related party transactions’, to avoid abuse of those transactions, as controlling shareholder has the opportunity for syphoning off shareholders’ fund by using those transactions.

Indian regulations also require the application of that rule in case of related party transactions. Globally, this rule is not applied in appointing directors.

The Companies Act requires the appointment of directors by ordinary resolution, that is by a simple majority. Special resolution (three-fourths of the vote in favour of the resolution) is required for appointing an independent director for a second term of five years.

It is inappropriate to suggest that nominating Kochhar for the position of director in ISL or by not abstaining from voting, the bank had set an example of bad corporate governance. If the bank has 79.22 per cent interest in ISL, it has the right to constitute a board of its choice. Therefore, if the board of the bank, based on its internal enquiry, has decided to maintain status quo, the decision does not signal bad corporate governance. Abstaining from voting after nominating Kochhar was not an option at all. The board cannot make decisions based on the outcome of a media trial.

Some experts suggest that the ‘majority of minority’ rule should be applied in appointing independent directors, as, in almost all circumstances, the controlling shareholder gets its nominees elected to the board. Perhaps, they assume that the role of independent directors is only to protect minority shareholders’ interest and control the CEO. This assumption is incorrect. Controlling the CEO is not the only responsibility of the board. In the VUCA world, the board has three main roles -- ‘control, service and strategy’, which include the role as ‘boundary spanner between the company and its environments’. Independent directors, being ‘loyal critics’, bring objectivity and different perspectives in boardroom deliberations and help the board guide the CEO and provide checks and balances. They play the crucial role of ‘boundary spanner’. It is in the interest of the company as a whole that right individuals are appointed as independent directors on the board to ensure that the board has the right capabilities and is diversified. Therefore, it is inappropriate to take away the right to appoint independent directors from the controlling shareholders, who are benefitted from the right composition of the board.

Applying the ‘majority of minority’ rule indiscriminately is against the corporate democracy, which requires decisions by majority shareholders. Minority shareholders usually do not have a long-term interest in the company. They have the opportunity to exit the company when the company is mismanaged.

The wiriter is director, Institute of Management Technology Ghaziabad Mail id: asish.bhattacharyya@gmail.com

ACCORDING TO MANY EXPERTS, ICICI BANK SHOULDN’T HAVE NOMINATED KOCHHAR ISL DIRECTOR