Is India Inc ready to raise the corporate governance bar?

The committee recommended the govt clearly stipulate strategic goals for PSEs, specifically its 'non-commercial objectives'

AUDIT COMMITTEE
 
For rewards, get execution  right
 
The Uday Kotak committee has further enhanced the role and responsibilities of audit committees by recommending:
 

• Expansion of nature and type of disclosures such as long- and medium-term strategy and valuation reports in searchable and standard format 

• Focus on key deltas in financial indicators and their causes

•  Capital deployment details to be disclosed

•  Analysis and comments on audit qualifications

•  Enhanced quarterly disclosures, scope of internal controls and the need to establish guidelines for audit quality

• Auditor credentials disclosure, fees and reasons for resignation

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

When looked at as a package, the recommendations appear to be designed to enhance oversight, design IT-enabled approaches to gauge effectiveness of disclosures and controls. Many of the tasks being recommended are already the remit of many enlightened audit committees, but there will have to be patience for a steep learning curve for others. The way forward will include:
 

• More frequent audit committee meetings, with sharp agenda items on cyber security, the vigil mechanism, the quality and effectiveness of internal controls, enhancing the quality of disclosures and valuation processes for various purposes.

• Longer meetings with a great deal of preparation. More than power points, a continuous engagement with the chief financial officer and company secretary will be crucial to bring about real change.

• Very stringent processes for accomplishing the onerous tasks, requiring planning and engagement of a much higher order.

 
As a set of individuals involved in this very special task, all of us will have to raise our commitment, engagement and time spent. The rewards will be for those who get the implementation right. Boards will have to give enough time to audit committees to present their findings. Ultimately, I have no doubt that this will lead to better shareholder value creation.
 

Shailesh Haribhakti, chairman, Haribhakti & Co LLP

PUBLIC SECTOR ENTERPRISES

Missed opportunity on reforming PSEs
 
The Uday Kotak committee-recommended policy changes to the existing corporate governance framework for listed public sector enterprises (PSEs) acknowledges that PSEs face unique governance challenges. The committee recommended the government clearly stipulate strategic goals for PSEs, specifically its “non-commercial objectives”.
 

In 2012, an investor filed a derivative action against Coal India for breach of fiduciary duties by its directors owing to supply of coal below market prices. If a clear mandate is laid down, investors can make an informed investment decision and such conflicts can be avoided.  It has been observed that listed PSEs have a poor track record of complying with listing norms. The committee has come out sharply against such non-compliance.
 
In Singapore, Temasek is a single holding entity for all PSEs and reports to the Ministry of Finance. The Kotak committee has recommended adoption of a similar structure for Indian PSEs by April 1, 2020. This is aimed at providing functional autonomy and reducing conflict of interest. Apart from laying down a timeline which might be an overreach, the committee has treaded with caution to avoid a turf war with the administrative ministry.
 
The “evolution not revolution” approach of the committee is praiseworthy but so far as the issue of corporate governance for PSEs is concerned, it’s a clear miss.

 
The committee has not considered revocation of the exemptions provided to government companies under various legislations such as the Companies Act, 2013, Competition Act, 2002, and listing regulations which provide preferential treatment to PSEs. 
 
Further, the committee has not recommended any specific mechanism for protection of rights of minority investors of a PSE. The committee should also have looked at state PSEs for there is a lacuna in corporate governance guidelines for state PSEs.
 

Param Pandya & Vedika Mittal are research fellows at Vidhi Centre for Legal Policy. Views are personal

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