Legislating independence in boardrooms, Sebi way

In the winter of his discontent, Alan Greenspan, the long-serving Chair of the US Fed, made a profound statement. "You cannot legislate for honesty" he said. It is perhaps time to take a leaf out of his book, and to recognise that one can't legislate for independence of mind.

Sebi's consultation paper, which was put out in the month of March 2021, envisaged a two-stage approval process for appointment of Independent Directors (IDs). The final regulations, which have been approved, and are expected to come into effect on January 1, 2022, have combined the two-stage process into one, and provided that a special resolution will be necessary in the case of every fresh appointment. As of now, a special resolution is required only for a re-appointment of a Director or for the appointment of a person who is the above the age of 75.

This is understood to be an attempt to factor in the voice of the 'majority of the minority'. The disconnect with contemporary reality is very obvious when a study is undertaken of the percentage of shareholders who have voted in support of resolutions for appointment of IDs.

In most cases, such resolutions pass with more than 90 per cent support, and in quite a few cases, it is as high as 98-99 per cent. Clearly therefore, minority shareholders have so far not demonstrated unhappiness with the candidates whose appointments have been proposed.

"It is also necessary to understand who these minority shareholders are. In uninformed conversation, there is a tendency to equate minority shareholders with retail shareholders. If the intention is that the proposal would benefit retail shareholders, a perusal of the shareholding pattern of many of the large companies will help dispel the myth. Institutional investors, both foreign and Indian, constitute, in almost all companies, a large majority of the minority shareholders," says M Damodaran, former chairman of Sebi, who is currently the chairman of Excellence Enablers.

Any attempt to empower minority shareholders will result in empowering institutional shareholders. It is not clear whether this is the unstated objective. The shareholding pattern of most companies will ensure that institutional investors will be able to checkmate the management in the appointment of IDs with whose track records they might be unfamiliar. What is worse, institutional biases and prejudices could impact on the voting pattern, he said.

Damodaran, retired IAS officer, is presently a governance consultant, advisor, mentor and coach, had worked with the Union and the State governments in India, regulatory bodies, investment institutions, banks, development financial institutions and with the private sector.

There is yet another element which should not be lost sight of. Most institutional investors act on the advice of the proxy advisory firms when it comes to supporting or opposing resolutions. Resultantly, any attempt to empower the minority shareholders will, at the first level, amount to empowering institutional shareholders, and at one remove, the handful of proxy advisory firms. There are some IDs who are truly independent, and some who are not independent. The first category does not require regulatory empowerment, and the second category will be impervious to regulatory encouragement. Business in India, he said, is carried out in an atmosphere of deep distrust. For several decades, businessmen have not been trusted to act in a bonafide manner. Over time, the distrust would appear to have been transferred from the businessmen to the IDs, with the default option beingthat the IDs will not act independently, especially when the interests of the majority shareholders are involved.

It is a sobering thought that in India's 75th year of independence, we continue to believe that there is no independence in India's boardrooms.

What is clearly missing is the recognition that boardrooms require behavioural attributes, rather than an understanding of legal and regulatory provisions.