Corporate

Independent directors have role of knowledge, scale and input; but don’t push too hard: Uday Kotak

Independent directors must play a role of knowledge, scale and input but we need to be careful to not push it to a battle zone level said eminent banker Uday Kotak. Technically under law, Kotak said, everybody has the same responsibility across the board. The role of management is to run and execute and come out with a whole business strategy and everything else The role of board is to challenge it and govern it, he said. Mahindra said the value of independent directors cannot be overstated I recognise I need curbing and to question and challenge. Only independent directors do that The institutional independent director is the strongest keystone in corporate governance landscape, he said. According to Kotak, the institution of independent directors is to be aware of and protect the minority shareholder community which has no say. Second is conflict between non-executive director non-independent versus independent. Therefore, many independent directors have a role of knowledge, scale, (and) input, Kotak said. However, he believes that while we recognise the role of independent directors as an institution, we have to be careful where we don’t push it to level where it is two sides of battle zone. That is where the regulatory framework should be careful of not pushing it above and over that edge. He said, the law in 2013 after the Satyam scam has given greater protection for independent directors compared to non-independent directors. Kotak said the issue in the profession stems from a potential conflict of interest where an association of accountants – ICAI – also acts as the sector regulator. One of the weakest links in fiduciary chain of governance in India is accounting Time and again we find that this situation is leading to significant issues for many listed companies whether it is on the equity markets or debt markets, he said. In the past year, Indian companies including IL&FS and Fortis have necessitated the need to relook at accounting standards in the firms. Kotak also added that the sector will undergo a change with the introduction of the National Financial Reporting Authority (NFRA) by the government as it will act as the single source of regulating all the auditors and will ensure that the signature of the auditor gets back the trust. As we in financial sector deal with markets and if we want to move much more market-based, we have to rely on that signature.

Industry captains Anand Mahindra and Uday Kotak on Thursday came out against proliferation of regulations in business, stating that in the current environment they are forced to follow the rules in letter and not in spirit When one takes a view that let’s follow spirit, and the letter is not clear, you get a push back (saying) ‘this is the rule; have you followed it or not’. You get a slap back. If you play for spirit, you run into problems. I have no ability to question spirit, (so) let me follow rules. We are living in this world where we are going in a transition from principles to rules, Kotak, said. Kotak had run-ins with the regulator over recognition of an instrument used by the bank to decrease promoter shareholding recently. Kotak also said auditors are one of the weakest links plaguing the corporate governance architecture One of the weakest links in fiduciary chain of governance in India is accounting. Time and again we find that this situation is leading to significant issues for many listed companies whether it is on the equity markets or debt markets, he said . He said there are six layers of corporate governance in our system including the company management, company board, credit rating agencies, auditors and regulators. Of late, these six layers’ work has been found wanting, he said, adding that they are not doing their job. Using tennis analogy to describe his predicament, Kotak said: In the early days of my career, I was very comfortable to hit the ball on the line. I have now come to a view (to) make sure you hit the ball inside the line. If it hits the line, then it is the umpire who decides whether it is outside or inside work towards following the rules but hit the ball clearly inside the line. He added that if the ball is adjudged by the umpire as being outside the line, there is a huge reputation risk which a company is exposed to because of the judgements of the 24×7 media. If you look at reputational risk, you are first hung in the court of media well before you go out to the real world, Kotak said.

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