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LATEST NEWS UPDATES | Boardroom rules

Boardroom rules

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published Published on Dec 18, 2009   modified Modified on Dec 18, 2009


One year on from the aborted Satyam-Maytas deal that eventually paved the way for Ramalinga Raju’s sensational confession of fraud some weeks later, the government finally seems to be getting serious about corporate governance reform. The revelation of accounting fraud at Satyam unfortunately distracted attention from more fundamental issues relating to good corporate governance, particularly the role of company boards. But now, the government is set to release a new corporate governance code which focuses its attention on the functioning of independent directors.

In the aftermath of Satyam, serious questions were raised about the role that the independent directors might have played in assisting Satyam’s crooked management. The new code is a move in the right policy direction, but by itself it may not be enough to reform corporate governance. The new code seeks to limit the number of boards a single independent director can sit on — seven will be the new maximum. The pay of independent directors will also be more tightly regulated. It will come in two components, fixed and variable; the former cannot be more than one-third the total, and the latter will depend on attendance. Independent directors will be allowed stock options but they will not be allowed to redeem them until three years after they have left a company board.

But perhaps more important than the specifics are the principles on which good corporate governance is based. The first principle is the supremacy of the shareholders, including the appointment and monitoring of independent directors. In India, this isn’t as simple as it sounds because a majority of listed companies are both closely held and tightly managed by promoters — there is no obvious separation of shareholders, board and management. Sebi has stated its intention to require companies to reduce promoter shareholding. That will help. But minority shareholders too need to get better organised to exercise their rights — financial institutions and FIIs, the best organised minority shareholders, can make a start by taking a keener interest in the appointment of independent directors. But what eventually matters is whether an independent director or two or more actually stands up to confront and check a management leaning in the wrong direction.

 


The Indian Express, 18 December, 2009, http://www.indianexpress.com/news/boardroom-rules/555530/
 

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