Last week, Unit Trust of India chairman M Damodaran bowled a googly at the corporate world when he asked that they put on hold all the awards for good governance until a large number of corporate houses adopt these norms in content rather than in form. He also asked credit rating agencies to put on hold their good governance ratings, since they were in danger of being used as crutches by lenders instead of conducting a thorough appraisal of corporate proposals.
Mr Damodaran’s comments couldn’t have come sooner; it’s high time someone was bold enough to call a halt to this charade of celebrating good governance. Over the last year, we have seen the corporate world erupt in united anger when the NR Narayana Murthy Comm-ittee attempted to push good governance into the realm of substantive changes. At the same time, we had the spectacle of half-a-dozen awards for good governance and social responsibility being handed out to firms whose growth strategy was based on breaking every law, rule and norm in the book and setting new lows in good governance. The awards were usually based on a set of mechanical parameters, and having them handed out through Union ministers, regulators, reputed judges, bourse chiefs and other luminaries legitimised the farce.
Those who were called to give the awards ought to have protested but didn’t. Mr Damodaran himself was connected with one such award, but probably couldn’t do anything at that time. Although I didn’t hear his speech last week, his reported comments are legitimate and timely. The ridiculous celebration of good governance must stop until we begin to see real change in corporate behaviour and firms imbibe good governance practices in substance and spirit.
Having said that, one doesn’t agree with everything that Mr Damodaran said. For in-stance, it is true that there are grave doubts about the fairness and utility of governance ratings, when they are voluntary and are paid for by the companies themselves. That is why only the best companies have obtained these ratings. But there is no reason why independent corporate governance ratings cannot force companies to be more conscious about their dealings with other stakeholders.
The Investor Education and Protection Fund (which is carved out of unclaimed dividends under Sec 205 of the amended Companies Act) had initiated a move to commission governance ratings from credit rating agencies as an important service for investors. But the idea was dropped because the DCA feared controversy and strong opposition by the corporate sector.
Mr Damodaran also said that financial institutions should have representation on the boards of assisted companies so that they can be part of the decision-making process. Having read only the reported excerpts of Mr Damodaran’s speech, one is not clear about his rationale. If he merely wants institutional representation on corporate boards in the form of non-independent, nominee directors, there can be no issue with his stand. The institutional nominees would then be on the board with a clear mandate to protect the lenders’ interest only. Happily, this will often coincide with the interests of other stakeholders, because nominee directors would ensure that funds are utilised for the purpose they were sanctioned.
Unfortunately, over the past few decades, bank and institutional nominees on corporate boards have only bestirred themselves to question management at the behest of government and to serve political interests. At all other times, they have looked the other way and permitted rampant misuse and diversion of funds. Even assuming that Mr Damo- daran makes his institutional nominees strictly accountable, it is unlikely to be true of all institutional directors.
One thing is certain. Institutional nominees cannot be equated with independent directors — that perception has to change. The Narayana Murthy Committee on corporate governance has correctly recommended that institutio-nal directors can always be a part of the board by virtue of their shareholding, but they cannot be considered independent. Even here, there would still be issues over whether a conflict could arise if the nominee director reports confidential information to his manage- ment before it becomes available to the public, particularly if that institution is also an investor in the capital market.
But this is nothing compared to the inherent conflict in Mr Damodaran’s two roles as head of India’s largest mutual fund and what was once the largest development finance institution (recently turned bank). Technically, it would be possible for information obtained as head of IDBI to be used in making investment decisions at UTI. It is only Mr Damodaran’s high credibility and impressive track record that precludes any hint of suspicion that either position would be misused. But the dual responsibility is still wrong and must end, as this too is part of the larger issue of good corporate governance.
While Mr Damodaran’s views on governance ratings and awards are valid, one would like to ask him why UTI cannot play a bigger role in nudging companies to become more accountable to shareholders. Both UTI Mutual Fund and IDBI are in a position to exert enormous influence over company managements as significant shareholders. Both institutions can and must align themselves with minority shareholders and play the role that CalPERS (California Public Employees Retirement System) does in America.
Over the last few months, US investors have claimed important victories by taking a united stand against management policies. A recent examp-le was Michael Eisner’s ouster as chairman of Walt Disney. The separation in the posts of chairman and CEO was only possible because of support from large pension funds and institutional investors.
UTI certainly had an opportunity to assert itself as a large shareholder when Grasim ac-quired over 10% of Larsen & Toubro at a huge premium in the ruling market. We don’t know if it did. But if industrialists are to learn that they cannot merely pay lip service to good governance practices, institutions like UTI and IDBI will have to play an important role.
-- Sucheta Dalal