The Indian School of Business (ISB) recently signed a memorandum of understanding with the Indian Institute of Corporate Affairs (IICA) to provide expertise on corporate affairs matters. In this interview, Professor Sanjay Kallapur speaks to Professor Asish K Bhattacharyya of the School of Corporate Governance and Public Policy at the IICA about the IICA’s role in light of the new Companies Act. Select extracts from what Professor Bhattacharya had to say:
On Stakeholders and Other Key Provisions of the Act
The Companies Act 2013 has expanded the concept of stakeholders. The stakeholders under the Act include debt holders, depositors and the others such as the National Stock Exchange (NSE) which in a broad way can be seen as a debt holder. The Act also includes employees and the local community.
Second, a much discussed mandate in the Act is for corporate social responsibility (CSR). Third, in the guise of providing immunity to independent directors, the Act has really enforced the accountability of this group. Independent directors will be responsible for the omissions and commissions of the company if they had knowledge of these through the board – or if they colluded with the management or if they did not act diligently. More importantly, the Act has provided a code for independent directors in Schedule IV. These are the basic issues with respect to the Act, vis-a-vis the role of IICA.
On the IICA and its Significance
The IICA is a think tank created by the Ministry of Corporate Affairs (MCA). As a think-tank, it focuses on research into understanding corporate governance issues in India. The Companies Act 2013 has incorporated global best practices. But the Indian corporate sector is dominated by group companies – public sector enterprises and of course family businesses where there is a concentration of ownership. Dominant shareholders in a way control the company. So there is a need for research to see how these best practices can be applied.
On the Role of the Regulator
The two main players in implementing the Companies Act are first, the regulator, say the MCA, as well as company auditors and second, the management and the independent directors of the company. Now the Act has enhanced the penalty for violations, both for independent directors as well as the key responsible officers they have appointed. How should the regulator look at these instances of wrongdoing? When we talk about penalty, the implementation of the law and its applicability in India implies harassment to independent directors as well as those who are involved in corporate management. And therefore the approach and the attitude of the officers of the MCA need to change.
So one role that IICA will play is tr y to understand issues in applying the new Companies Act. It will attempt to provide input to the MCA through training and otherwise, about the limitations within which companies and independent directors have to work. This role includes part research and part training of the regulators.
The role of independent directors has been clarified. It is not that anything new has been brought in but that accountability has been enforced. The independent directors have to understand their liabilities and related issues in corporate affairs. For example, if you look at the code for independent directors, he or she is supposed to bring in an independent view on issues related to strategy, financial reporting, risk management, performance evaluation and so forth. Now we need to appreciate that with respect to strategy, not only in India but globally, there is confusion on what role the independent directors need to play because there is always asymmetry of information between the executive management and the independent directors. Should the independent director stop at performance evaluation? Or should they feel happy when the executive management presents the strategy formulated by it to them, maybe annually?
I think that independent directors need to play a more important role in strategy formulation and implementation. So there is a need for training in all the areas that have been covered in the code for independent directors. IICA needs to play a role in developing the capabilities of independent directors. At present independent directors are really not well-equipped to deliver according to the expectations of the regulator and investors.
I think that independent directors need to play a more important role in strategy formulation and implementation. So there is a need for training in all the areas that have been covered in the code for independent directors. IICA needs to play a role in developing the capabilities of independent directors. At present independent directors are really not well- equipped to deliver according to the expectations of the regulator and investors.
We want to help both private sector and public sector organisations as well as those who want to be independent directors build capabilities. After ten years, or about two terms, most independent directors in the board will have to vacate office. Currently, independent directors hold positions for a pretty long time, except in public sector enterprises. But there is a rotation: if you are retiring from this public sector unit then you get into another one. But in the private sector, tenures of 10 years, 15 years, 20 years and even 30 years are seen. How can we then build the capabilities of the younger generation? We need to build a body of knowledge for future independent directors.
The code assigns a huge responsibility to independent directors. For example, the code says that the independent directors and the remuneration committee have to play a very important role in fixing and designing the remuneration of the people who will occupy not only board positions but also at lower levels. These are the core management team as well as functional heads. But one, the role is not mandatory and second, particularly in promoter-managed companies, the committee cannot really work very well. This role requires not only technical skills but also leadership qualities.
Corporate Social Responsibility (CSR)
A huge opportunity is thus opening up in different areas. IICA needs to fill in that gap by providing the relevant training. That is why IICA is entering into collaboration with ISB, which is another topnotch institute in management as well as with others. This is so that we don’t reinvent the wheel but rather use the knowledge and resources available in India and abroad.