From UPSC perspective, the following things are important :
Prelims level : SEBI
Mains level : Paper 3- Issues with corporate governance in India
Over the past 10 days, the revelations about the functioning of the National Stock Exchange (NSE) during the tenure of Chitra Ramkrishna as Managing Director and Chief Executive Officer (CEO) have raised questions about the governance.
Managerial misconduct at NSE
- There was managerial misconduct at NSE.
- An effective board of directors: That is why we need checks on management such as an effective board of directors.
- After the board was informed about the irregularities in Mr. Subramanian’s appointment, it discussed the matter but chose to keep the discussions out of the minutes on grounds of confidentiality and the sensitivity of the matter.
- Second, despite being aware of Ms. Ramkrishna’s transgressions, it allowed her to resign and on generous terms instead of taking action against her.
- Third, the Public Interest Directors (PIDs) failed to keep SEBI informed about the goings-on at the NSE.
Issues with corporate governance
- In the corporate world, much is forgiven on grounds of performance.
- When a performing CEO chooses to unduly favour a particular individual or individuals, boards see that as a forgivable infirmity.
- As for dysfunctional or ineffective boards, these remain the norm despite numerous regulations, seminars and papers over the past four decades.
- In case of the the NSE, the problem is structural.
- Selection and absence of penalty: It has to do partly with the way board members are selected and partly with the absence of penalties where directors do not live up to their mandate.
- Board members are selected by top management (or, in India, by the promoter who is also top management).
- Board members have every incentive to nod their heads to whatever the management wants to be done.
- 1] Diversity in the selection of board members: As long as the top management selects all board members or can influence their selection, there is little hope of any active challenge to management.
- The top management must be allowed to choose not more than 50% of the independent directors.
- The rest must be chosen by various other stakeholders — financial institutions, banks, small shareholders, employees, etc.
- 2] Accountability of board members: A second thing that needs to happen is holding board members accountable for lapses.
- Regulators act against directors where there is financial malfeasance.
- This must change. Regulators must penalise errant directors through a whole range of instruments — strictures, financial penalties, removal from boards and a permanent ban from board membership.
- 3] Accountability of regulator: Regulators themselves must be held to account.
- In the NSE affair, questions have been asked of SEBI.
- For instance, why did SEBI not seek the help of the cyber police to ascertain the identity of the yogi?
- SEBI needs to explain itself.
Convulsions of outrage after particular episodes will not take us very far. We need significant institutional reform if corporate governance is not to remain an illusion.