Pay control will corrupt corporates

Last Updated: Mon, Oct 12, 2009 06:00 hrs

In an environment of competitive symbolism with austerity measures, the debate triggered by Union minister for corporate affairs Salman Khurshid over managerial remuneration is indeed ominous.

Having termed trends in top managerial remuneration in corporate India as "vulgar", the minister is reported to have "clarified" that while the government had no desire to "control" remuneration, there was a need for "regulation". "It is impossible to say that we will shut our eyes and let anybody do what they please," he is reported to have said. "The display of affluence is unacceptable. We follow the footsteps of Mahatma Gandhi and are trying to lead our life with simplicity."

Affluent politicians in India are obviously upset with what the affluent corporate Indian is permitted to legitimately take home as a pay package. The politician’s intended response: change what is legitimately permitted.

The Companies Act, 1956, has for long regulated managerial remuneration. It has capped what can be paid to designated senior management and members of the board by linkage to the size of profits. The manner of computation of profits too is prescribed in the law. Within the overall limit, a requirement to seek government approval is prescribed, should the remunera-tion pay-outs breach certain sub-limits. Indeed, shareholders have to approve remuneration, but the control of government over what can be earned by corporate management is still writ large.

What the government intends for the future is even greater leverage and control. The central theme of the new Companies Bill tabled in Parliament, now referred to the Parliamentary Standing Committee, is a heavy reliance on delegation of powers to the government to make rules.

Prescription of how to compute profits for purposes of managerial remuneration too is proposed to be delegated to the government. Therefore, what the common civilian can take home would only be capable of easier control by the man in uniform.

Shareholders are owners of their company and the business of the company is owned by the company. A company ought not to pay its managers anything found unacceptable by the shareholders, who are the real bosses and beneficial owners of the company’s business. If shareholders decide to pay their managers (indeed, within the limits prescribed by law) no one else ought to have a legitimate grievance about it. Making the law stringent is fraught with risk.

The law could regulate how one goes about getting the consent of shareholders, the nature and scope of disclosures to be made to shareholders and could even place restrictions on voting by parties interested in the remuneration proposal (the intended recipient of the remuneration, who could also be a shareholder, could be reasonably prevented from voting as a shareholder, on a resolution dealing with his salary). However, the government ought not to interfere with the sovereign right of the shareholder to determine what his company ought to pay its managers.

Many members of the present government have cut their teeth in the control regime that prevailed pre-1991. It is only because the bania running businesses had to keep running to the bania running government that a large part of post-independence Indian history is a chronicle of poverty, sub-optimal opportunities and an intrinsic rightful membership of the third world.

The post-1991 era unlocked the power to dream, created opportunities here, started reversing the brain drain, and attracted international talent to serve Indian shareholders. For Indian companies to have foreign expatriate management reporting to Indian bosses was unthinkable 20 years ago, but it is not uncommon today. Any application of the control regime mindset and desire to play God on the part of government will roll us back to that era.

Recently, Singapore had a major public debate about the steep hike in salaries of ministers in government (it was raised to corporate levels and expectations on performance too rose to hire-and-fire levels).

In contrast, the salaries paid by government to its politicians and constitutional servants, even after discounting the public spirit aspect is abysmally low. However, the reality of the political culture is stark. We have Cabinet ministers whose attendance rate even in Cabinet meetings is as low as 10 per cent. If their offices were to have musters, or they were required to keep time-sheets to show how much of their time went into discharging duties of office, their pathetic record in attendance to work would stare us in the face.

Self-regulation by the political class would be a good beginning. If elected representatives in government started working well, or rather, even started working, they would start earning the moral right to preach the philosophy of Mahatma Gandhi to corporate India. If they were to blindly flex muscles and hide behind semantics of "regulation" versus "control" and inhibit what can be legitimately earned by serving corporates, they would incentivise private sector corruption. Indeed, the control regime nurtured a highly corrupt corporate culture where kickbacks to promoters and managers could be the norm rather than the exception, where the corporate Indian would use state control to rationalise corrupt practices, the same way politicians rationalise corruption in public life to the standards of remuneration for men in government.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own)

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