Important sections, relating to corporate governance, of the Companies Act 2013 (hereafter Companies Act) came into force on April 1, 2014. The Securities and Exchange Board of India (Sebi) introduced the new corporate governance code in 2014 and India ushered in a new era of corporate governance. However, after companies found it difficult to implement the provisions of the Companies Act and Sebi code, the government amended some of the provisions of the Companies Act. It has formed a committee that will suggest necessary amendments to ease implementation of the provisions of the Companies Act. I wish the committee to take an objective view and not dilute the corporate governance norms while addressing the concerns of the industry.
The soft law (spend or explain) on corporate social responsibilities (CSR) was introduced as a part of the Companies Act. It requires companies above certain financial threshold to spend 2 per cent of the average pre-tax profit of the previous three years on the CSR. If a company fails to spend the amount it needs to explain the reasons for the same. Companies need more clarity on the CSR law. Some of the requirements are in conflict with the spirit of the law. For example, the dictum that 'CSR activities should exclude activities undertaken in pursuance of normal course of business' deprives society of the benefits from the use of the capabilities of companies in community development. For example, a hospital is best in providing healthcare services, but it is not allowed to provide the same under the CSR. I wish the government to bring clarity on the CSR law and review the rules.
Many companies and politicians could not appreciate the spirit of the CSR. Many politicians see it as an additional source of fund for the development of their respective constituencies. Therefore, they directly and indirectly decide the CSR spending by companies. Some controlling shareholders use the fund to enhance the social stature of their family members. It should be kept in mind that the CSR spending comes out of resources that belong to the company (shareholders). CSR projects should benefit the company. While the focus should be on community development and protection of natural resources, the CSR strategy should flow from the business strategy.
I hope that CSR committees will be much more effective in coming years. It should consult all stakeholders (including politicians and local administration) in deciding the CSR policy and approving CSR projects, but should not be guided by politicians.
The Companies Act has made board evaluation mandatory effective 2014-15. The law is little confusing. It requires the Nomination and Remuneration Committee to carry out evaluation of every director's performance. It also requires independent directors to meet separately to review the performance of non-independent directors, board and the chairperson. The law needs simplification. It should not prescribe the process, as one process does not fit all. The board of directors (here after board) of many companies could not appreciate that board evaluation is a serious business and it is in the nature of self-evaluation by a group of knowledge workers for self-improvement.
I hope that in future many more boards will implement the process seriously.
It is too much to expect that the institution of independent directors would significantly improve in one year. But what worries is the apathy of companies and directors to enhance board capabilities. Directors are not motivated to attend training and chairpersons neither facilitate nor encourage them. Many independent directors do not fully understand the business model, and the strategy of the company and its risk exposure. It is the responsibility of the management to train independent directors in various aspects of business. Directors should also be encouraged to hone their business management skills by attending training programmes of different institutions.
Although events in 2015 signal increase in shareholder activism, it is not at the level at which it will impact the quality of corporate governance. E-voting has reduced the cost of exercising voting right in general meetings. But that has not enthused institutional and retail investors to exercise their voting rights. The apathy of institutional investors in exercising voting right is disturbing. I wish institutional investors and proxy advisory services to be more enthusiastic in improving corporate governance in India.
The Companies Act has created the ecosystem that supports corporate governance. During 2015, the quality of corporate disclosure has improved significantly and CSR spending has gone up. But it is a long way to go.
The writer is chairman, Riverside Management Academy Private Limited, and professor and head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs