Governance code impact: 40% of NSE-listed firms will have to split CMD post

256 firms have five or less members on their boards

The proposed corporate governance code framework is expected to have a significant impact, forcing companies, including several blue-chip names, to reconstitute their boards, rope in more directors, and seek shareholders’ blessings on big pay packets for top executives and royalty payouts.

Currently, nearly 40 per cent of 1,670 companies listed on the National Stock Exchange (NSE) have the same individual acting as chairperson and managing director (CMD). Of these, 144 belong to the top 500 company index, and 14 are part of the benchmark Nifty 50 index. Some of the marquee names on the list include Mukesh Ambani of Reliance Industries, Azim Premji of Wipro, Pawan Munjal of Hero MotoCorp and Shiv Nadar of HCL Technologies. There are also CMDs of several large PSUs, such as ONGC, Coal India, and NTPC. 

An expert panel on corporate governance, consituted by the Securitites and Exchange Board of India, has recommended the separation of the roles of chairperson and chief executive at India Inc to provide “a better and more balanced” governance structure and effective supervision of the management. 

The committee has called for the separation of the posts in companies with less than 60 per cent public shareholding by April 1, 2020, and in the remaining companies in another two years.

The impact of proposals on board compositions could also be widespread. The committee has recommended the minimum number of directors be increased from three to six. Currently, 256 , or 15.4 per cent listed companies’ boards comprise of five or less members. About 19 companies have the bare minimum three members, and 82 have four directors on their boards, shows the data provided by Prime Database. 

Further, the proposals will create openings for 637 women independent directors. Currently, these companies have women directors that belong to the promoter group — often the spouses or relatives of top executives. Also, about a fifth of listed companies will need to add more independent directors to meet the requirement of having at least half of the board as independent.
 

The “role of the board of directors of listed entities has been subjected to gradual reform, a holistic re-assessment is required to further strengthen the same”, says the report submitted by the 25-member panel headed by Uday Kotak, vice chairman and MD of Kotak Mahindra Bank.

The panel is of the view that it is critical to have the sufficient number of directors “with diverse backgrounds and skill sets” on the boards of listed entities to fulfil these functions and obligation.

Another key recommendation that is expected to impact a large number of companies is on high remuneration paid to executives. In a bid to reduce instances of “disproportionate payments” to executives, the panel has proposed that companies seek nod from public shareholders if they want to pay a salaries of over Rs 5 crore, or that exceeding 2.5 per cent of their profits (whichever is higher).

An analysis of remuneration paid by India Inc in 2016-17 shows that more than half companies could be needed to float special resolutions to continue paying high pay packets. About 34 companies, part of the Nifty 50 index, pay salaries of over Rs 5 crore. Some companies have multiple executives with salaries above the proposed threshold. In some cases, the salaries are high despite losses incurred by the companies.

The proposal on royalty and brand payments will impact some key multinational companies, including Maruti Suzuki and Colgate-Palmolive, wich pay over 5 per cent of their revenues as royalty to their overseas parent. The committee has suggested these companies take the approval of at least half of their minority shareholders for royalty payments of over 5 per cent of consolidated net profits.

HOW BOARD COMPOSITION WILL BE AFFECTED

• Proposal: Minimum number of directors increased from three to six
• Impact: 256 NSE-listed firms (15.4%) have five or fewer directors currently

• Proposal: At least one woman independent director
• Impact:  637 companies (38.1%) don’t have a single such director

• Proposal:  Same person can’t be chairperson and MD, CEO
• Impact:  640 companies (38.3%) have the same person as chairperson and MD, CEO 

• Proposal: At least 50% of directors need to be independent
• Impact:  326 companies (19.5%) would need to change composition of their board

• Proposal: Special resolution to appoint non-executive director with age of over 75 years
• Impact: 972 non-executive directorship positions occupied by directors with age of over 75 years

Source: Prime Database; Universe: 1,670 companies listed on NSE

(Kotak Mahindra and associates are predominant shareholders in Business Standard Pvt Ltd)