My initial thoughts on the new Companies Bill

I had sent a letter to a news publication last week on my thoughts on the new Companies Bill, that was recently passed by the Rajya Sabha and is now awaiting final signature from the President. They didn't publish it, but I thought i'd still like to put it in the public domain.

The new Companies Bill should be welcomed for its newness, if for nothing else! The fact that it replaces a piece of legislation that is over 50 years old should itself be an indication of how inadequate our corporate laws have been in dealing with contemporary economic issues.
 Corporate Governance is not a term limited to Board rooms and annual reports anymore. With increasing media scrutiny and demands for greater transparency, corporations can hardly afford to work behind opaque management and ownership structures. Corporate Governance scandals, long scoffed at as a thing to be seen only in Europe and North America, now occur in India with more alacrity than we would like to admit.
 There is no doubt in my mind that the intangible strengths of any organization are closely linked to its financial health. Corporate Governance issues in an organization certainly factor in investors sentiment that drives any company’s share price. Through the new Bill, there is an expectation that now organizations will be forced to be more transparent about their management styles and ownership structures, and greater transparency, in my opinion, is a good thing in itself. Considering that Boards are now tasked with direct responsibility on many issues, it can be expected that organizations will have no choice but to appoint more capable, and independent in the true sense, directors who must be willing to step up and take on the responsibilities.
 Board structures today seem to be driven by a quid pro quo understanding. Many independent directors sitting on the Boards of some of the blue chip companies are there to simply lend their good name to the Board, and not necessarily as an active, and alert, independent director who is willing to go against the popular opinion if need be. In return, they get a good compensation, have to attend only a few Board meetings in an year, and few of them sign on the Company’s annual accounts.
 While it will take more than a Bill to change this way of doing business that is firmly entrenched in our typically promoter driven organizations, I do expect that it will pump in some adrenaline into the nascent shareholder activism in the country.
 Now coming to the second, and perhaps the more discussed and contentious issue in the Bill, the mandatory CSR spend within the parameters stipulated in the Bill. To contend that this requirement is thrust upon companies that do not have the competence to run such activities is misplaced.
 For one, Indian companies are already responding to their social obligations and expectations in a variety of ways. Large organizations, the kind that Clause 135 aims to include, already have flourishing CSR practices that focus on a host of social issues, such as education, healthcare, livelihoods, and infrastructure.
 Secondly, the Bill is not looking to create a new bureaucratic layer to police on companies to ensure they are following the guidelines, but aims to achieve compliance through enhanced reporting, and clearly assigning roles and responsibilities within an organization.
 Through the Business Responsibility  Report and sustainability reporting, organizations are already reporting on their social and environmental activities in and around their areas of operations, and the various ways through which they are engaging with their internal and external stakeholders. SEBI, through the Business Responsibility Report, clearly mandates the top 100 organizations to assign the responsibility of an organization’s CSR activities on a member of the Board or executive, apart from clearly listing the scope and size of their CSR activities.
 Thirdly, I think this Bill will formalize, and make more transparent, the processes and roles within organizations that undertake CSR activities. From a corporate governance point of view, this greater transparency will ensure that the flow of funds is fully accounted for and reported at all points in the value chain. From a corporate governance point of view, this will deter promoters from misusing the existing rules to claim tax benefits on activities that can hardly be seen as CSR.
 In the aftermath of the 2008 economic meltdown, a common refrain was that when organizations make profits, it is theirs, but when they falter, the society has to bear the burden. Expecting organizations to step on their activities that give back to the society should not be seen as an anti-economic measure that will erode their competitiveness. No organization today can function without obtaining its social licence to operate.
 Organizations that have realized this would think that this new Bill does not change much, other than bring the Government at par with the current trends.