‘Quality of disclosure determines governance’

Meleveetil Damodaran is one of the few persons in the country who has the credentials and experience to lucidly explain the concepts of corporate governance. The former Chairman of securities regulator SEBI and financial institutions IDBI and UTI and now a go to expert on corporate governance for India Inc, he unravels the nuances of governance in an interview with BusinessLine. Excerpts:

Corporate governance does not lend itself easily to quantitative measurement. It is a question of feel good about the practices and being satisfied that there is a value system underlying the decision making process in the company. An indicative list of quantitative indicators are the composition of the board in terms of independent/non-independent directors, separation of positions of CEO and Chairman, number of meetings held, time allotted to each, especially the committees, and the tenure of directors (they should not be present endlessly).

Compliance is a threshold or hygiene factor which is non-negotiable and does not mean good governance. Compliance has costs and at one level is regarded as a cost but governance is an investment. When the cost of a new regulation to a company is greater than the benefit to stakeholders writing such regulations should be avoided. What differentiates tick box versus actual good governance in companies?

We have to ask whether companies are there for the short-term or are they seeking perpetuity. Then you look at sustainability. For sustainability, good governance is a requirement. A company might be successful in the short-term. The Satyam Board did not know what was happening and the US Court in a class action suit ruled that independent directors of Satyam were victims of the fraud not colluders.

Regulators should not get into the areas of management in the name of regulation. Regulation and control are different.

Take bank boards, for example. The number of returns that they are supposed to discuss will take two days, if they do it in detail, no other business will be discussed. The approach should be that laws are easy to understand, clear in objective and have an elementary continuity/certainty. If they are changed every quarter, it causes confusion and even good guys fall foul of the law.

We don’t give enough credit to the retail investor. Whenever they sense something is not right with a company they exit such companies.

On the day when Ramalinga Raju’s letter was out, they did not sell other IT companies, Hyderabad-based companies or companies audited by Price Waterhouse.

And then there are institutions/ analysts who ask questions and write about issues. You cannot hide bad governance practices anymore.

Regulators should enforce quickly and punishment must be both severe and swift so that others learn from it.

What needs to be done is to have disclosures that are complete, correct and contemporary in nature. That’s the answer. The quality of disclosure will determine the governance.

Look at a comparable universe — people in your same industry. One of the things which do not get discussed is the level of importance of a particular executive to the company.

Ask yourself the question on what the chances that an executive will leave if he falls short of his KRA by 10 per cent and his variable pay cut. Dig a little deeper than quantitative KRAs.

For holding somebody you have to pay enough to stay. For independent directors too, little money would not attract quality talent and too much would ensure they do not remain independent.

I think institutional investors if they sense wrong doing they make a noise. They exit the company, vote with their feet but their exit can hurt retail investors.

They should put their foot down, stand and fight. They should make an honest effort to set things right in the investee company.