Leo Puri: ‘Need systemic review of non-compete fee, preferential issues to promoters’

I think, without doubt, standards have risen significantly. It has been recognised by global investors as an area where India has shown marked improvement. Some of this improvement is a response to spectacular past failures in governance, and some of it is due to the initiatives taken by Sebi, e.g. through listing agreements. Credit must also go to the Ministry of Corporate Affairs for strengthening governance through the Companies Act. In parallel, the boards of major companies have been revamped and repositioned.

Do you see grey areas in the governance norms?

This is a journey and there’s no defined endpoint. Clearly when you’re dealing with a topic as subjective as good governance, context and circumstances differ, so sweeping judgments are unwise. There are two or three areas where we will have to continue to work. One, the structure of our market remains dominated by companies that are promoter-led. That’s not a bad thing, because promoters are often aligned with shareholders on value creation, but they also have fewer checks should things go awry.

Second, we continue to have a large number of public sector units. The reform of corporate governance within the public sector is an area that needs urgent attention to bring it in line with market expectation. The third is the willingness of institutional investors to engage companies and have their voice heard. This has begun, but has a long way to go in order to be effective. These are all areas that need to develop further if our governance culture is to be rated first rate.

Are independent directors doing enough to bring fairness and transparency in operations? Are they really independent?

Yes, without a doubt. It is a very difficult task being an independent director. It’s often been pointed out that in some ways it’s a thankless task. There’re many more liabilities than benefits in most cases. Nevertheless, one of the more successful governance reforms has been the role the independent directors are playing. In many of the significant companies today, you can see that the body of independent directors are adding value to issues related to succession, having their voice heard in related party transactions etc. It is not a universal phenomenon, but there are very good role models developing in this community of independent directors. Promoters also recognise the importance of having credible boards, that include people who are viewed as truly independent. Ultimately it reflects in valuation and lowers the cost of capital. There’s plenty of evidence that the market rewards good governance and independent boards. There has been both carrot and stick involvement in this transition. The role of independent directors is a visibly successful reform, despite the concerns that you hear from time to time.

Do you think Indian institutions and mutual funds are doing enough to improve governance standards?

I think this is a nascent area; in the last two or three years this has been gathering momentum. The catalyst for this has been the regulator. SEBI has been instrumental in encouraging both the necessity of voting, of providing a rationale and disclosure of voting patterns. Certainly there’s heightened awareness and responsibility in the mutual fund industry. The next step must be to involve the life insurance and pension sector in this process.

In future, if our market has more independent asset managers, as opposed to asset managers who are themselves controlled by banks and corporates (who may on occasions have conflict of interest on issues of governance and voting), that will also be a positive boost to governance.

The MF industry has formed a proxy committee in AMFI where the CIOs (chief investment officers) can come together and discuss their views on controversial resolutions. That’s not a mandatory committee because votes have to be exercised by each independent mutual fund. But where they wish to act together, they can act together.

What’s your view on the concept of non-compete fees and preferential allotment to promoters?

Unfortunately, they are permitted by law. I say unfortunately, because there are very few incidents where they are truly justifiable. Presently we have a few of these practices which are legally permitted, and therefore it is natural for people to utilise them. Perhaps there could be a systematic review of these practices by SEBI to determine whether they are relevant in the modern context. Some of these practices had historical necessity to protect the entrepreneurial class when markets were developing, but their time has passed. Institutional investors can also exercise oversight, but often their votes are outweighed on these matters.

Are retail investors still being short-changed by malpractices like insider trading and front-running in the market?

Most of the efforts at governance reform in India in the past were focused on prevention of malpractices. Examples are incidents like Satyam and others. There has been a tendency to police companies, rather than develop companies through effective boards. When it comes to policing, we have been fairly effective. Despite that, there may still be loopholes that might occur, and you can still have a breakdown in governance. Ultimately governance is a function of culture as much as legislation. It’s what they call the ‘tone at the top’. It can’t be just a matter of regulations and rules. I think we have done as much as we could in terms of policing. Malpractices, if they exist, are likely to be fairly rare. The board is not necessarily the only source of malpractice and it can’t be held accountable for every fraud that occurs in a company.

Corporate governance is not just about policing… it’s also about strengthening companies so that they grow, create wealth and ultimately benefit stakeholders. So a good board must focus much more on the development of a company, which is entirely compatible with good supervision. I think that shift must happen. We still spend 95 per cent of our time worrying about malfeasance and less than 5 per cent of time on evaluating boards on their contribution to the growth and development of the company.

Some of the requirements that SEBI has introduced for public shareholders to vote on related party transactions are welcome. I think we have made great progress and now need to encourage boards to spend more time on the growth of the company.

Do you think the governance system is low/ poor in family-owned companies? How can this issue be solved?

My personal observation is that in India today there is little distinction in the quality of governance between companies that are family-owned, and those which are widely held, professionally-managed, government-owned or MNC-linked. There will be instances of good governance and slippage in governance in all categories. To re-emphasise: that is a function of culture and the tone set by leaders. Common issues arise, whether they are lapses in executive compensation, oversight, related party transactions, or poor succession planning. I can point to examples in any of these categories of companies, which will apply equally. Today the relevance of whether you’re family-owned etc is not the primary issue for governance, but there are specific skills independent directors in such environments need, to operate constructively.