How regulatory systems should deal with corporate governance came to the fore at the annual conference of the International Organisation of Securities Commissions last week in Cape Town. Opinion across securities regulators seemed to be evenly mixed.
A section of the opinion was for adopting a “light-touch” approach to corporate governance instead of a prescriptive regime, others felt that general statements of principle will never work with people fundamentally “unprincipled”.
What was evident is that every regulatory regime is grappling with how to regulate listed companies in relation to corporate governance.
Hand on heart, each regulator understands that there is no ideal framework to ensure best behaviour by companies listed in its market, although the approach of the regulators could vary from a completely prescriptive one to a system based exclusively on moral suasion of directors of listed companies.
In India, regulation of corporate governance in listed companies has come to stay with Clause 49 of the listing agreement prescribed by the Securities and Exchange Board of India (“SEBI”).
This framework essentially revolves around the composition of the board of directors having to include a certain component of independent directors with the hope that the independent directors would have some fear of reputation and litigation risk, and therefore, act as a check and balance.
Such an approach muddles its way around the subject. By appointing the specified number of independent directors one could claim to have attained technical compliance with the prescribed norm. However, every director, including the independent director, holds office at the pleasure of the shareholders.
Indian listed companies entail substantial concentrated shareholding in the hands of promoters, who therefore would have.
Therefore, Clause 49, through its various amendments, has become confused between whether it should target being a check and balance on the promoter, or on the company’s management.
The Reserve Bank of India’s (“RBI”) approach to corporate governance in banking companies, which may seem “light-touch” in approach (with statements of principles from the RBI on matters to which the banks’ boards should apply their minds to) the RBI has over-arching statutory powers to veto even the appointment of a single director to the board of a bank. The RBI has the power to supersede the entire board of directors of a bank. Indeed, SEBI too reads such powers as part of its omnibus power to issue directions “in the interests of the capital market” under Section 11B of the SEBI Act. In the past, SEBI has directed specific individuals not to associate with listed companies in any manner, which is nothing but a ban on becoming a director of a listed company.
Against this backdrop, the question regulators should ask themselves is what their real intended object is in the area of corporate governance.
It may be useful to introspect whether having a wider chest and broader shoulders with ever-increasing powers is a matter of pride, or whether facilitating private parties to settle disputes is a more effective approach. One radical solution, particularly in common law jurisdictions such as India, is for governments to focus on cleaning up inefficiencies in the judicial system so that shareholders and stakeholders can settle scores with corporates and their managements in a judicial forum.
Fear of having to face expensive litigation and suffering a reputation risk alone would deter mis-governance and spur logical decision-making by corporate boards. Indeed, SEBI has instituted a scheme to fund class action suits by shareholders, and that is a foundation it should build on.
If trial of a suit for damages were capable of resolution within a reasonable period of time, regulators would be saved much time and energy spent in measures that make them look like chasing their own tails. Therefore, regulatory energy would be better spent in pushing governments to make courts work better.
The fraud by Satyam management provides us with a classic example. Satyam investors in the United States have been able to extract a settlement from the company for the accounting fraud committed by it and have been able to lay hands on real money.
In contrast, investors in India have and will lag behind, although the fraudster is Indian and the issuer of securities is Indian. SEBI may issue regulatory directions to individuals allegedly involved in the fraud under Section 11B of the SEBI Act “in the interests of the capital market”.
However, apart from giving the regulator the pride of having inflicted injury on an alleged wrong-doer, SEBI’s jurisdiction would enable it do precious little for the pockets of the investors.
It is only the court system that can use its jurisdiction to assess and award damages for wrong-doing. Our law-makers and regulators should strive towards making the private litigation and dispute resolution system efficient instead of expending tax-payer’s resources in regulatory interventions that do nothing for the bottomline of the investors.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.)