Arun M Kumar, chairman & CEO, KPMG in India, spoke on the corporate governance aspects in family-owned companies and listed companies in India in light of the recent report of the SEBI Committee on Corporate Governance. He also gave an insight into the Insolvency and Bankruptcy Code, 2016. Sai Venkateshwaran – Partner and Head, Accounting Advisory Services, KPMG in India, contributed to the interview.
Q. The Kotak panel in its recent report proposed some radical changes. In fact, even the Ministry of Corporate Affairs (MCA) has turned down 12 of its 24 recommendations. Your comment.
Arun M Kumar: The committee focused on evolution, which is doable, and not radical changes that may not be practical. The recommendations turn the dial to improve corporate governance. It’s a very complex environment, one that has to evolve to make Indian businesses successful and make India attractive for investors – domestic and foreign. The Ministry of Corporate Affairs (MCA) has written a letter with their comments, and the committee in turn has recommended that SEBI consult with both the MCA and the Finance Ministry in implementing the recommendations. Based on a quick read of the MCA comments, I would say it’s about the manner of implementation – who does what. So, my sense is that in principle everybody agrees that corporate governance is an area which needs to continuously advance. There were many steps in the path to do that, this is another step along that way. What’s interesting is that you had 24 people representing different areas and all working together under Uday Kotak’s leadership to see how we advance the state of corporate governance in a very practical and doable way.
Q. The proposal to split the CMD's post will impact several top promoter led groups in the country. Do you think this is a necessary step?
AMK: This is an area which is debated world over. In the US, the consensus seems to be on not mandating the separation, while in some parts of Europe, the consensus is to separate it. The Committee felt that India should separate the chairman and managing director for certain companies. The goal was to have a board which represents the shareholders collectively and not be dominated either by a chairman or a managing director. When you combine the two roles, shareholder and management interests can be conflicted. The chairman sets the agenda for the board functioning and one of the main roles of the board is to monitor the operations and overall functioning of the company in line with the mandate and will of the shareholders, with the chairman setting the tone at the top and acting as a facilitator who fosters an environment for open and honest debate. The CEO’s role, on the other hand, is a management role, responsible for driving the operations, while also having the additional responsibility to be a director. This is why there is a need for some balance, because a chairman’s focus is on shareholders and other stakeholders, whereas an MD also has to focus on that, but his primary role is that of a key manager.
Q. Will the separation help strengthen the board?
AMK: I believe that it will make the board more effective by making it more independent from management. It is the chairman’s responsibility to steer and optimise the role of the board and to encourage open discussion, challenge and where required, criticism. The chairman controls agendas, steers the discussion, calls for the vote, among other things, and will be more effective in executing this role, if he/she does not also bear management responsibilities.
“The goal was to have a board which represents the shareholders collectively and not be dominated either by a chairman or a MD.”
Arun M Kumar
Q. The role of independent directors has been mired in controversy. What is expected of IDs? In what situations do they fail to act with independence? Why is that the case? Do you think the Kotak panel proposals on IDs will bring about the desired changes and strengthen corporate governance?
AMK: First, the independent directors have two big roles— to protect the interests of all shareholders, especially with respect of minority shareholders, and to contribute to long¬–term value creation. A promoter director will arguably have the promoter’s or manager’s interests to manage. Prima facie, the independent director doesn’t come on the table with any interest, except the interest of shareholders as a whole. This makes the role of the independent director central to good corporate governance. To promote shareholder confidence, an independent director should not be seen as affiliated to the promoter or to management.
Sai: The increased proportion of independent directors on the board, together with the recommendations on the introduction of a lead independent director, stricter independence criteria, mandatory trainings and exclusive meetings of independent directors, will certainly empower independent directors to function more effectively and make their voice heard in the governance process.
Q. In what situations do the independent directors work independently?
AMK: It’s a process of evolution. Over time, we need to enhance the quality and competence of independent directors and provide the mechanisms to make them effective in taking care of the shareholders’ interest. To get there, we need to enhance the pool of independent directors. We need to make sure they are compensated for the work they do and they are protected from the risks and liabilities that they run. The Committee addressed these issues recommending, for instance, minimum compensation levels. Directors and officers have to ensure they have liability insurance. Also, as we have more independent directors, the ability to work independently will increase. When we have only one–two independent directors, with promoters and executive directors, it becomes very difficult to have a real say let alone act as a whistleblower.
Sai: Independent directors are also becoming cognizant of the significant penalties that they are exposed to if they don’t act diligently. So, while there may be attractive compensation, on one hand, to attract them, there are also penalties. As of today, there is a need to strengthen the monitoring and enforcement mechanisms to see if somebody hasn’t discharged their duties. One of the other changes recommended by the Committee on the role of lead independent director will also go a long way in giving them a collective voice, and in turn help in changing their behaviours in the boardroom. Another important aspect is that an independent director’s effectiveness is linked to the information that he/she is given access to, and it’s in this context that the matters that are subject to oversight by the audit committee have been enhanced, in particular with a focus on oversight of group entities.
“The board dynamics change the moment you have a woman on the board, and it is seen to become more open and collaborative...difficult or sensitive issues are less likely to be brushed aside...”
Q. Since 2013, boards have been mandated to include women independent directors on board. There was a report recently that 38 per cent of NSE–listed companies do not have women directors on board. I am not asking why they are not on the board. Rather, what perspective do they bring on the board? How can they make a difference apart from bringing diversity on the board?
AMK: I think it is accepted around the world that women have a different way of looking at things than men do. They bring different experiences which inform different points of view. This is why we see everywhere a keen recognition of the need for women in management and leadership positions.
Empirical studies show that the presence of women makes a difference in the work culture. My firm and I strongly believe in the need for more women in leadership. I think most firms have a long way to go.
Sai: The board dynamics change the moment you have women on the board, and it is seen to become more open and collaborative. It is seen that difficult or sensitive issues are less likely to be brushed aside, and discussions take into account perspectives of multiple stakeholders and not just shareholders. But certain studies have shown that while one woman can make significant contributions, they start to make a real difference when you have three or more women directors on board.
Q. How are the dynamics of corporate governance different in family owned businesses and listed companies?
Sai: The domination of family owned and family run businesses in India still continues amongst India’s listed companies. However, the trend will change over time, especially with the emergence of some of the new age businesses, which while they are currently run by the founders, are largely owned by other investors, including venture capital and private equity investors.
One of the key aspects of board room dynamics is the role that the promoter plays in the boardroom. A promoter who is also a dominant personality, may not always cultivate a culture of open discussion. This becomes more pronounced when the promoter also wears the hat of both the CEO and chairman. It’s in this context that the separation of roles of CEO and chairman has been proposed in the committee’s recommendations.
I think it’s wrong to equate ownership structures with the quality of corporate governance. However, when family–run businesses start acting in self-interest rather than in the interest of all shareholders, corporate governance becomes questionable. Family–owned businesses with right kind of ethics and principles wouldn’t have issues in attracting the right kind of people to their board.
Q. As work on addressing the stressed assets continues or what we can call the battle against bankruptcy, the country continues to face an economic slowdown with private investments stagnant since 2015. How do you see business and industry shaping up in the near term and long term?
AMK: The new insolvency regime should actually help to address some issues. On the one hand, banks can restructure their balance sheets, recapitalise and be in a position to start the lending cycle once again. On the other hand, those assets that are currently going through the resolution process can be added to the productive engine of the economy.
Q. Please share some of key findings of KPMG CEO survey?
AMK: We conduct this survey every year and about 100-150 CEOs participate in it. This year the theme was disruption. The interesting thing to note is 80 per cent of CEOs said their goal is to be the disruptor rather than getting disrupted.