Mumbai: The Securities and Exchange Board of India (Sebi) is taking a re-look at board-level decision-making processes and their disclosures in listed companies, said three people familiar with the development, including two officials at the regulator.
These key board-level decisions include the appointment and removal of directors; the implemention of new corporate strategies such as grouping of companies, acquisitions, partnerships and transferring promoter control within associated entities; and evaluation processes such as deciding the remuneration of directors and the impact of their decisions.
The markets regulator is examining these issues at a time when a boardroom battle at Tata Sons Ltd has raised questions on corporate governance issues and the role of directors. Indeed, in a board note dated 14 January, Sebi said that a re-look is needed at the appointment and removal of independent directors in light of the “Tata imbroglio”.
On 5 January, Sebi had also floated a guidance note on how companies should evaluate directors’ performance, how they should consider whether discussions among board members are healthy and free-flowing, whether critical and dissenting suggestions are welcome and whether conflicts of interest are monitored and dealt with.
Now, the market watchdog is examining whether a special resolution, which needs 75% approval of those voting, is needed to remove independent directors from company boards. Current norms stipulate special resolutions only for appointing independent directors, while removing them requires only an ordinary resolution, which needs a simple majority. Nusli Wadia, an independent director on three listed Tata firms who was ousted via ordinary resolution, had raised this point in a complaint to Sebi.
“It is felt that the present provisions make the removal process less stringent than the appointment process. The same principle should be applied for his removal also i.e. special resolution made necessary,” said the board note. The regulator’s international advisory board made the same recommendation when it met on 14 January.
“Sebi is also mulling whether promoters be allowed to vote on matters related to independent directors as they are the first level of check on a listed company,” said a Sebi official, one of the people cited earlier.
“We definitely need a higher standard for removal or reappointment of directors but whether restraining promoters from voting on such proposals is the right way to do it or not is something debatable,” said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services (IiAS).
Sebi didn’t respond to an email seeking comment.
“Every board has to be balanced and the appointment of every board member, their removal and their decisions should be consistent with the company’s objectives,” said the second of the three people cited earlier.
Second, Sebi may ask firms to disclose evaluation reports of board members and board committees and make them more rigorous and more frequent. “For board evaluation norms Sebi has to ensure that the norms are not over-reaching,” said Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, a proxy advisory firm. “One major way to improve corporate governance is by making investors act more responsibly and question companies directly about their board’s decisions, the board structure, the role and profile of directors. Sebi should try doing that slowly.”
Third, the regulator is considering asking audit committees to regularly assess potential risks taken by the company due to appointments of any director or due to decisions taken by any director in the past. Sebi is also examining whether audit panels should provide reports on future risks for the company due to board’s immediate decisions.
“Audit committee should also focus on forward looking risk assessment in addition to retrospective evaluation,” said the minutes of the international advisory board’s meeting . “It would be a good practice if the result of the evaluation of the board as a whole is disclosed to the shareholders.”