Welcome to Clause49

SEBI has done well in merely postponing the deadline for compliance with Clause 49 of the listing agreement. It must continue to resist pressures to dilute its standards and show the world that it is intent on raising the corporate governance bar and more importantly, in taking punitive action, where necessary. The plea from public enterprises to declare the government's official directors as independent is indeed interesting. It appears they were covering the potential embarrassment arising from laxity in appointing independent directors before the deadline by deflecting the issue. Nowhere is an official nominee defined as an independent director-he is the representative of the dominant share-holder and also a salaried co-public servant who, at times, also has regulatory authority. In New Zealand, civil servants are not allowed on the boards of state-owned enterprises. The US administration is increasingly refraining from exercising autho-rity to nominate such directors, leaving the space for independent directors. In some countries, there are specific guidelines for civil servants, if appointed at all, to allow abundant scope for the independent directors.

There is new thinking on applying corporate governance principles for state-owned enterprises. The OECD has recently issued the draft principles for state-owned enterprises that closely follow the internationally acclaimed First Principles of Corporate Governance for Public Enterprises developed by us in 2000. These principles seek to increase the role of independent directors while restructuring the relationship between the ministries and public enterprises. The answer to the immediate pain of the listed public enterprises is to re-engineer processes of appointment of independent directors following the guidelines already in place than try describing oranges as apples!

The cynicism is more apparent among private enterprises, when they talk of a desi variety of corporate governance. They forget that the corporation, company laws and stock exchanges are not invented here. And that the recommendations by oft-appointed committees are mainly to reinterpret global thinking for the domestic markets. There are global standards that are already in place and there is convergence to meet new protocols, standards and codes. The Report on Observance of Standards and Codes, by the World Bank/IMF surveillance system is a gentle reminder to the world to quickly fall in line. Just as there are international standards for food, medicine, automobile emissions, internet, operating systems, electricity, currency settlements, accounting, auditing, secretarial practice and the like, so are the ones for corporate governance. It is the wisdom of the majority-or the powerful, if you will-that these standards are good for companies, capital markets and economies. If we have a different logic to convince the world, we must do so by participating in the larger debate and the consultative processes that precede such standards.

The lobby to soften the definition of independent directors, avoid CEO/CFO certification and blow away the whistle-blower policy is, indeed, retrograde. Companies intending to grow globally cannot afford to take a low road to corporate governance. They must go beyond minimalism, as some are already showing the way. Any lesser enthusiasm will be punished by capital markets and investing and financing institutions. Companies must know, for example, that CalPers, which is now active in India, has its own definition of an independent director that is far more stringent than SEBI's. Research analysts and rating agencies also use international templates rather than what is comfortable for the local markets.

Instead of resisting the rapids, wise companies sail with the international tide, and if possible, even lead the way. Companies with growth ambitions must quickly understand the spirit and dynamic behind the standards, instead of resorting to cynical circumvention. They must realise that even the stock exchange regulator is not a free agent-there are global expectations on its behaviour, standards and actions. In the comity of regulators, one cannot afford to be marginalised as non-conformist, lackadaisical or complacent. Evidently, there is massive need for corporate governance advocacy and sensitisation that might act as an antidote to uninformed cynicism.