New Delhi, Oct 07: While the floodlights were on the Naresh Chandra Committee (NCC) Report and the consequent Companies Amendment Bill, 2003, Sebi stole a quiet march with the Narayana Murthy Committee (NMC) Report on corporate governance replacing Clause 49 of the Listing Agreement, a few weeks ago. The Companies Amendment Bill, 2003, is still to be passed by Parliament. The NMC and NCC reports cover considerable common ground, including independent directors, audit committee, role of directors, codes of conduct etc, as the terms of reference and focus are very similar. It’s the divergence in outcome that makes the comparison interesting. In board composition, the NCC recommends a majority of independent directors, and a woman director for larger public and listed companies. The new Clause 49 requires 50 per cent independent directors for a board-managed company, and one-third, where the company has an executive chairman. The parameters of independence being identical, the issue here is whether the independent directors concept is being pushed too far. Their role is envisaged as being the conscience-keeper of the minority investor. But a cadre of such directors as contemplated in the Amendment Bill is not necessarily the appropriate counter to a sincere promoter’s efforts. A completely independent and professional board did not prevent Enron. Both committees have made sincere efforts to make independence demonstrable. The NMC report adopts seven rating parameters such as importance to members, transparency, enforceability, verifiability, implementability etc. It recommends that all pecuniary relationships, including compensation of non-executive directors, would be disclosed in annual report. The crunch comes in the audit committee structure. NCC had recommended the audit committee should consist exclusively of independent directors, except in case of closely held unlisted companies. The Amendment Bill has diluted that to a minimum of two directors with prescribable maximum, and is silent on the functions.
Clause 49 requires a minimum of three directors, with the majority being independent, and an independent chairman. What is significant is the requirement that all members should be “financially literate”, with at least one having accounting/financial and management expertise. This ensures that the audit committee will maintain the financial balance between promoter and minority investor. The role, powers and functions of the committee have been dealt with in exhaustive detail.
Even more important is the inclusion of the Whistle Blower Policy. The NCC report (and resultant Amendment) does not deal with whistle blowing — though the US Sarbanes-Oxley (SOX) Act provides private action rights and protection to employees. NCC relies on the yardstick of “when in doubt, disclose” but stops at that. Clause 49 meets this issue squarely, providing for employee’s rights to access the audit committee with regard to unethical management practice. The company policies must provide for such right of access and affirm a report in that respect as part of the board report on corporate governance in its annual report. The dividing line between whistle blowing and confidentiality could have been dealt with in further detail.
On the lines of the SOX Act, NCC had recommended CEO and CFO certifications of its annual audited accounts, but refrained from recommending criminal prosecution in cases of misstatements and omissions. The Amendment Bill has dropped this altogether. Clause 49 provides for such certifications qua the balance sheet, profit & loss account, and internal control systems. In fact, in the matter of definition of independent directors and independent director exemptions, the NMC has in toto adopted the NCC recommendations.
With the Parliamentary legislation not being implemented and the listing agreement being only a contract, will Clause 49 remain a virtual showpiece? It is unclear whether Section 24 of the Sebi Act extends to it. The Companies Act covers not just listed companies, but large public companies, with punitive recourse. It’s not merely investors, but creditors, too, who require protection, which transparent financial management can provide. The Amendment Bill must be totally compatible with Clause 49 before it’s tabled; otherwise the purpose is defeated.