The Hindu Business Line : Of ethics and regulation

Regulators have been attempting to lay down rules, regulations, policies and procedures in an attempt to turn companies honest. The Sarbanes Oxley Act, the detailed disclosure norms mandated by the International Financial Reporting Standards (IFRS), t he Clause 49 of the Listing Agreement in India and the Companies Bill, 2009 are good instances of such efforts. The Ministry of Company Affairs has stated that it intends new legislation in the Companies Bill, 2009 segregating the duties of the Chief Executive Officer and the Managing Director of an entity.

This segregation is something that has been followed internationally for years now. In some European Union countries, there are two separate boards, an executive board for the day-to-day business and a supervisory board for control purposes (elected by the shareholders). In these countries, normally the CEO presides over the executive board and the Chairman presides over the supervisory board, with different people manning these posts.

This ensures a clear distinction between management by the executive board and governance by the supervisory board and allows for clear lines of authority for decision-making. The aim is to prevent a conflict of interest and too much power being concentrated in the hands of one person.

Indian Directors

Clause 49 of the Listing Agreement strengthened the powers of the Audit Committee (AC) with this intent in mind — a good portion of the constituents of the AC would be independent directors. Large entities in India have formed different committees manned by different personnel in compliance of such regulations. It is also a fact that in many companies in India, the CEO and MD are the same person — company history, financial issues and other cultural factors could make two powerful men at the helm with differing responsibilities a dream.

The Companies Bill, 2009 seems to give legal sanction to this by defining Key Management Personnel in Section 2 (zza) — the Managing Director, the Chief Executive Officer or the Manager and where there is no Managing Director or Manager, a whole-time director or directors, the Chief Financial Officer and the Company Secretary (CS). There could be entities in India where these two posts are held by separate individuals in which case their job responsibilities would in all probability be different.

Financial ‘literacy’

The Companies Bill does not define the qualifications of a Managing Director or the CFO but the CS has to be a member of the Institute of Company Secretaries of India. It would be interesting to decipher if the MCA wants segregation of duties in case there are two posts or it wants entities to have two posts mandatorily.

Section 145 of the Companies Bill, 2009 provides for three clauses and 13 situations in which a company cannot appoint a person as a director — any company management would not appoint a director guilty of acts under the 13 situations anyways.

The move by the MCA marks one more attempt to force ethics and discipline into managements in India. The recent decision by two judges of the Supreme Court not to sit in judgment on cases belonging to a company — because a relative of the judge was employed in the legal firm that advised the company and because the spouse held paltry shares in the company — reflects the Indian diaspora regarding ethics — some will do it voluntarily, some will do it if instructed and some just won’t do it. Regulations are intended for the last set.

(The author is a Hyderabad-based chartered accountant.)