Promoter Director – Time to become Custodian of Governance!

Neha Shah- Team MentorMyBoard

17 Feb 2021

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Corporate Governance as a subject has become extremely popular post India has witnessed some disastrous ethical failures due to lack of appropriate business processes. In early 1990’s specially after the introduction of an important term like Globalization, various reports on Corporate Governance started floating to India making this as one of the hottest topics of discussion. Curiosity of people on critical key-terms like Organizational Structure, Role of Board, Fiduciary Responsibilities, Evaluation of Board, Concentration of Power, Independence of Directors and more started triggering Indian businesses.

Later, in coming years, few companies in order to ensure certain best practices began to understand the essence of Board composition as well the impact of right Board composition on the stakeholders. In the wake of Corporate Governance as a serious matter of concern, it would be appropriate to state that India has grown by leaps and bounds. Corporate India’s attention has evolved from ‘simple management’ to ‘effective governance’. Given the unique challenge that India faces due to predominance of family run businesses, there is a pressing need to move from the Raja and Praja Model to the Custodian of Governance Model with a conscious effort. While some promoters have started realizing that independence in thinking of Boards as their asset, many are still reluctant to distribute their powers with a fear that it may lead to forgoing their ‘promoter throne’.

In India, the control of promoters can be observed through shareholding structure of the Company. Where the concentrated ownership dominates the Corporate landscape, the promoters of the Company take complete power to influence the functioning of the rest of the Board, which is often seen as prejudicial to the interest of the Company. The main rationale behind independence of directors is then questioned. We have seen multiple examples starting from Tata Sons to Coffee Day Enterprise where role of Promoter Directors and authority of Independent Directors to take right decisions were questioned, which ultimately led to governance failures in top companies. Boards’ independence is shadowed by promoter dominance. The role of an independent director is complex when it concerns the family run businesses. Unfortunately, they have to navigate through the family-issues to decide what is in the best interest of the company and its shareholders and accordingly struggle to take right decisions in their favor.

It is well known that in 2017, Kotak Committee with an aim to improving governance standards of Indian Listed Companies came out with a detailed Recommendation Report known as ‘Kotak Committee Report’ wherein major recommendations were introduced to enhance Boardroom dynamics like introduction of new faces to the Boardroom highlighting the concept of ‘Diversity & Inclusion’, separation of the Role of Chairman and Managing Director, exclusion of Board inter-locks i.e. persons who constitute the ‘promoter group’ of listed companies cannot be appointed as Independent Directors in order to avoid common practice of promoters to be on each other’s boards or appoint relatives as independent directors, mandate to appoint Woman Director on Boards, revisit to the Board Composition and more. Despite accepting and rejecting few recommendations of Kotak Committee, it is very critical to understand that the changes that were intended to be introduced were to keep a check on functioning of naughty promoters and ultimately protect the interest of stakeholders of the Company. The real implementation has definitely posed immediate practical challenges for some listed entities and an increased cost of compliance, yet, considering the long-term sustainability of the act, it will certainly ensure better utilization of the time of promoters and establish sound governance systems across all listed companies.

It is high time when professionals and Independent Directors take a stand to make companies realize that the problem lies in the mindset since promoter conceives a business idea and decides to form a Company. Here is where the role of right consultation comes in the picture. Merely forming a company doesn’t help promoters attain their g oals. It is the complete understanding of the law as well as the essence of law that provisions are trying to communicate so as to ensure better governance models since inception. Reconsideration and thorough understanding of terms like independence of boards, accountability, transparency, ownership structure and more is the need of the hour.

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