Author : Prof. Avirup Bose & Prof. Meghmala Mukherjee, JGLS)
Article Type - CRG Article
There is an interesting article written by Mr S N Ananthasubramanian and Dr M S Sahoo in Business Line. The article starts by pointing out that in India’s evolving governance landscape, retired top officials to the Government of India and former heads of statutory regulatory agencies are increasingly stepping into boardrooms as non-executive chairpersons. The aim could be to give more powers to the ones who are defining them, giving assurance of proper governance to all stakeholders. It focusses on whether regulatory authorities should actively step in to lead, dictate, and reshape company boards, or should they remain at arm's length as independent monitors?
https://www.thehindubusinessline.com/opinion/regulators-as-board-leaders/article70984275.ece
It is a known fact that several regulators after retirement step into law firms and regulators. But the presence of these people should not ipso facto be a reason for conflict of interest. It is expected that these companies will interact with these regulators themselves, but it does not necessarily need to be assumed as a quid pro quo in terms of post-retirement benefits.
The interesting aspect is that most of them do not come in as independent directors, because there is a much higher threshold there in terms of both qualification as well as a higher degree of responsibility. So, while the conflict of interest is definitely one of the main issues, if a particular company wants to have expertise, and an ex-regulator brings in those expertise, there could be reasonable arguments made for why such a position should be made available to them on a board to provide policy directions.
(As per CRG data, there are at least 7 professionals who after donning the role of top positions in regulatory organisations have shifted to the Corporate sector, post-retirement.)
It is also true that if there is technical or regulatory expertise, specifically if the person is from a finance background, then transitioning from a financial or sector regulator to a private sector company makes sense. But of course, the major issue to settle here is that of conflict of interest.
When one examines international perspectives, routinely in Europe and in the United States, one sees the example of industry and technical people who sign a waiver agreement when they enter into FTC or DOJ or any of the other government offices. And then after a period there, they go back to their industry workplaces. It is a model that could be applied here.
It could make clear the position with respect to the idea of impartiality. It would also avoid situations like the one in May 2014, when the new government had to pass an ordinance so that the former Chairman of Trai could become Principal Secretary to the Prime Minister.
Essentially, then the question becomes if we should recalibrate and rethink how independent directors act within the boardrooms! And are they necessarily equipped with the necessary tools, or are they too easily influenced by the management?
These are important questions. For instance, coming to the issue of independent director vs non-executive director, there does not seem to be much of a liability difference between the two. This is the reason why when trawling the websites of companies, they don't identify and differentiate between independent directors and non-executive directors.
While under Section 149(11) of the Indian Companies Act, 2013, both enjoy exceptions from certain liabilities, independent directors often face additional challenges in terms of access to management. So now, you have a lead independent director who is supposed to basically manage the liaison with the executive.
Also, Independent directors are technically not supposed to meet the management as often as non-executive directors do. So, maybe, they are placed within the lesser burdensome role of non-executive directors to give them more access to management and decision-making. Independent directors are typically supposed to operate on a hands-off approach. Again, as some research done in the JGLS by us shows the remuneration for non-executive directors is often far higher than that permissible for independent directors.
Like some of the mutual funds were voting on appointment of this X person. I think this was in one of the pharma companies and they were proposing that this person gets like a Rs 80 lakh package as a non-executive director. And the thing is that this person is already the CEO or in the management of some other companies as well. It's not like this is their only bread and butter. So maybe it's also the money reason.
This brings us to the question of money. Employees in regulators, like those for other civil servants, receive quite low salaries. The chiefs of regulatory institutions retire with a take-home salary of possibly not more than 3 lakh rupees a month. The asymmetric scale of remuneration vis a vis those in the private sector is also often a draw. These issues matter.
Pointers:
· There is also the risk of dilution of board accountability, as higher powers to the regulators could enable management to shift the accountability from themselves and shift blame towards the regulators.
· Different industries have different needs and require flexibility in approach, which the regulators cannot provide through the rigid rules for populating the boards.
· Regulators often expect independent directors to act as internal watchdogs, which is definitely necessary. However, the latter also has other functions to perform that add strategic value and help the Company to grow.
(These are the personal views of the author. They do not necessarily reflect the opinion of OP Jindal Global University or its affiliated institutions)
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