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Corporate governance in India is in a better position than a few years ago, said Mr. Damodaran President of Excellence Enablers, and former President of SEBI, UTI and IDBI. India does not need more laws to ensure good corporate governance with performing directors in boardrooms;
While there is a positive shift in favor of corporate governance among investors and many private sector organizations, the government's response leaves much to be desired, said Damodaran in an interview deepened with Moneycontrol Opinion. Publisher Viju Cherian. Excerpts published:
Q: On November 19, former Nissan chief Carlos Ghosn was arrested for fraud and led to his dismissal. How do you think this impacts on the board of directors and on corporate governance in general?
A: All this stems from a clear understanding of the role of the board of directors. There are boards of directors in India and abroad who do not understand their role … and in the absence of a clear role, they end up providing indiscriminate support to the CEO .
The CEO is a person identified with the company, who is often the face of the company, in the good times, the person to whom all the good is attributed, and therefore, they (the board) are very happy to play the role of cheerleaders. When everything is played in the face, excuses appear as explanations, but they are clearly only excuses.
The role of the board – and it is not rocket science – is: supervision, direction and control. It has no executive or operational responsibility as it is the responsibility of management. However, he must ensure that management does his job properly. It is the responsibility of the board … The board, as a stakeholder representative, can hold management to account.
Q: What do you think of corporate governance in India?
A: Let me do my best and stay positive as far as possible. We are in a better position today than we were four or five years ago. I think a lot of companies recognize that governance is important for staying long term and prospering in the long run.
Q: How is corporate governance in India relative to the international situation?
A: Internationally, there are some who have done the right thing inside and outside the meeting rooms. We will not measure them immediately. However, we are certainly better off than in many countries where there is not even a pretense of corporate governance.
Q: Can you clarify this point of view?
A: What are we doing now? ? We are drafting new laws and regulations, but that is not the way to go. Laws must be simple, simple and not be changed too often to ensure continuity and certainty. Enforcement is important, as is regulation.
The laws are not lacking. The problem, especially in India, is that when something goes wrong, someone wants to draft a law or regulation. This happened even after (the) Satyam scandal. It was a self-confessed fraud that did not require any new legal provision; existing laws were sufficient. Our systems are so dilatory – not only regulators, but also our courts. Compare Nick Leeson and Harshad Mehta: Look what happened to Leeson – everything went so fast. Mehta had a conviction under section 138 and nothing under the Securities Act. In India, the time required is several years or decades and, as we come to a conclusion, this conclusion is meaningless.
Q: From the point of view of corporate governance, is there a gap between the pace at which things move and the pace required to maintain progress?
A: Let me look at this from SEBI's point of view. More surveillance throws more cases, which are taken in chronological order. To clean this up, the consent mechanism was introduced (when I was president). This was done so that the technical problems and the smaller ones do not clog the system. Regulatory capacity is also a factor here, as is the application of technology in the commission of an offense.
Q: So we're catching up.
A: This will always be the case. The policeman always runs after the thief … but you must be close enough to the thief; you must anticipate. Do not wait until everything goes wrong, then take action. But do we have the resources for that?
What I would like to see at SEBI – I tried to do it while I was there but that was not promoted at the very stage of the concept – is to create a separate organization outside of SEBI for execution and investigation. Thus, when you have a complex case, you bring outside professionals for a limited period and specific to the needs of this case. The survey will be completed within a specified time and you will have people with the required skills. As in the United States and the United Kingdom, we need movement between the regulator and the regulated entity. We need such a system. Such a move will help anticipate problems or even fill in gaps.
Q: Why do you think this approach was not considered?
A: She faced the usual problem we face in India: everything is suspected before a fair trial.
Q: Should we blame the bureaucratic configuration for this delay and this attitude? process – but the processes are obsolete and in a sense they all create a defense case. This leads to decisions that are not made because it is prudent not to make decisions.
Q: Speaking of complacency in boardrooms, what do you do with the episode IL & FS?
A: For one, it was an economic model that went terribly wrong. Without enough capital, you can not go indefinitely into every imaginable space. You do not need to participate in every action. I guess the board was seduced by the enthusiasm and energy of management.
To be fair to the board members over the past two and a half years, they are discussing alternatives and considering investing. It did not work. This was not a case where people had their hands in the crate. This is a case where management clearly failed and the board looked without understanding what was going on.
The board did not measure up, but the risk management committee did not meet for two years. The audit committee knew that everything was wrong and that at some point it should have been digging and saying that was enough.
Q: Private sector banks have had a lot of corporate governance issues lately: we have the conflict of interest in ICICI and the Yes Bank fiasco. Your comments?
A: Over the years, we have come to believe that the private sector and privatization are synonymous with efficiency and honesty. Because you have seen some transgressions in the public sector, you can not conclude that the private sector is bathed in milk.
What has happened in the private sector, and partly in the media, is to blame is that we have people raised to the level of deities. Others are made to believe that these people are infallible, invincible, and clearly indispensable to the organization. As we discover now, no one is indispensable.
Q: … we create superstars from CEOs?
A: We created a superstar from Harshad Mehta; he and his Lexus car were on the cover of every magazine.
The strong CEO model, which is the model of growth at a certain stage, has its limits. The strong CEO should not be so strong that everyone and all processes are reduced to irrelevance. Look what happened at ICICI: the ink did not dry on the complaint when the company announced that everything was fine. Then it was said that the same complaint was received two years ago. Then it was discovered that you had not informed the exchanges of what you had done with the complaint. Then the council did not have the courage to ask the CEO to withdraw. I was the first to recommend to the CEO to go on leave during an external investigation. All of this eventually happened, but it was already too late.
Q: S Address independent directors serving on boards of directors and their role in corporate governance; is it counterproductive to think of them as the "opposition party" in a conference room?
A: It's completely counterproductive. Laws are being developed where you have raised expectations among independent directors … Following the lawsuits against independent directors in the Jaypee case, the badets of family members are at the rendezvous! When you travel this far, the last independent director of the board of directors will ensure that he does not suffer such a fate. As a result, almost every proposal will be questioned and blocked.
What if the independent directors were lined up in the board room and decided to oppose each proposal, because each proposal would benefit the majority?
Q: In this scenario, what should be done to make the boardroom more efficient?
A: The constituted council must not be one-dimensional. You get people on board according to the needs of the company. Next, ensure that all board members perform their duties. So, there should be an induction. Then there is the annual badessment of the council. If the badessment is not correct and each board member is rated 6 out of 5, the board will not work properly. I must admit that I have every interest in doing external evaluations of the board of directors, but the evaluation of the board of directors must be carried out every two or three years by an external body with experience of advice. d & # 39; administration. Boardrooms should also contain a mix of alumni and youth.
Q: How many organizations submit to an external evaluation?
A: Very few. Less than 5%.
Q: Investors seem to penalize only performance, not failures in corporate governance. Does this reflect society as a whole? or is it because corporate governance does not have the primacy that it should be?
A: About 15 years ago, there was no link between good governance and good performance. Today, it is common knowledge that good corporate governance is a prerequisite for sustainable performance, without which the company will fail. Today, investors have the feeling that "I will not put my hard-earned money in a company where I do not know what's going on". Institutions support companies with good corporate governance. You Get a Market Bonus for Good Governance
Q: Corporate governance rules do not seem to matter in public sector companies, especially those in the public sector. public sector banks. Your views?
A: The public sector is in a way the antithesis of governance. When you have a majority shareholder who confuses ownership and management, and who is constantly on guard, you can not have governance. The mandate given to the CEOs is short. Directors who sit on the board do not necessarily add value to the corporation. The governments that make the law must also comply with this law. Whether it is independent directors or women directors, the government was the last to follow him.
We must not forget that "the governments that make the law have the highest responsibility to obey the law".
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