Kotak panel suggestions may result in 'tick-box' approach: Report

Committee recommended major overhaul of corporate governance norms for listed companies

The Securities and Exchange Board of India (Sebi) panel’s many suggestions on corporate governance are prescriptive in nature, presenting a risk that companies might undertake a ‘tick-box’ approach for compliance, proxy advisor InGovern said on Friday.

The high-level committee, headed by banker Uday Kotak, has recommended major overhaul of corporate governance norms for listed companies and the report has been put up for public consultation. The proxy firm believes that listed companies may not adopt the spirit. To avoid this, it suggested that recommendations should be categorised into two codes — Code of Acceptable Governance and Code of Desirable Governance — which will put the responsibility on the companies themselves as to what code they desire to adopt.

“The companies’ choice will also send a clear message to investors based on which they can make informed investment decisions,” InGovern Research Services said in a report. “Many recommendations are prescriptive in nature, which presents a risk that companies may not adopt the spirit but undertake a ‘tick-box’ approach for compliance,” it said.

The panel last month had recommended limiting chairmanship to only non-executive directors. The proposal would eventually lead to a split in the posts of chairman and managing director. The proxy firm said this suggestion should be adopted as a mandatory code rather than a discretionary code. “It is essential to prevent concentration of executive powers and responsibilities in the hands of one individual,” the report said. Also, the committee recommended for appointing at least one woman as independent director. The current rules require that there must be one woman on board, irrespective of her being an independent or executive director.

InGovern said the proportion of women independent directors was very low, but if the committee’s aim was to enhance gender diversity, then more women directors should be mandated instead of its suggestion that women directors should be independent directors.

“There is no compelling logic that the women directors should be independent directors. Hence, we disagree with this recommendation. It should be left to the companies to decide how they want to benefit from diversity, and hence a mandated number of women directors is not desirable,” the report noted.

InGovern agrees with the recommendation of having a minimum of six members on the board of listed companies, as a board with less than six members will not have sufficient diversity of views.