One of our pet peeves on this Blog has been
the fact that the corporate governance regime in India does not adequately
address the requirements of companies that have controlling shareholders (or
promoters), which dominate the landscape in India. I have also advanced this
argument in a couple of academic papers (here and here). While there does not seem to
be much momentum in India to address these issues, some recent developments in
the UK may be noteworthy.
the fact that the corporate governance regime in India does not adequately
address the requirements of companies that have controlling shareholders (or
promoters), which dominate the landscape in India. I have also advanced this
argument in a couple of academic papers (here and here). While there does not seem to
be much momentum in India to address these issues, some recent developments in
the UK may be noteworthy.
The Financial Services Authority (FSA) in
the UK has put out a consultation
paper to increase the effectiveness of the listing regime that contains
corporate governance norms. Specifically, it seeks to rein in controlling
shareholders. The following is an extract from the Press
Release issued by the FSA:
the UK has put out a consultation
paper to increase the effectiveness of the listing regime that contains
corporate governance norms. Specifically, it seeks to rein in controlling
shareholders. The following is an extract from the Press
Release issued by the FSA:
Corporate Governance
The FSA proposes
to further strengthen the Listing Regime by adopting greater corporate
governance requirements for companies with a dominant shareholder. The
FSA will increase the tools available to independent shareholders to influence
the governance of the companies in which they have invested. These proposals
include:
to further strengthen the Listing Regime by adopting greater corporate
governance requirements for companies with a dominant shareholder. The
FSA will increase the tools available to independent shareholders to influence
the governance of the companies in which they have invested. These proposals
include:
– introducing the
concept of a ‘controlling shareholder’;
concept of a ‘controlling shareholder’;
– requiring an
agreement is put in place to regulate the relationship between such a
shareholder and the listed company;
agreement is put in place to regulate the relationship between such a
shareholder and the listed company;
– and ensuring
that this agreement is complied with on an ongoing basis. This will ensure that
the company is managed independently from that shareholder.
that this agreement is complied with on an ongoing basis. This will ensure that
the company is managed independently from that shareholder.
The FSA also
recognises the important role that the independent directors play in these
circumstances. Therefore it will also insist on a majority of independent
directors on the board where a controlling shareholder exists and introduce a
new dual voting procedure to allow independent shareholders to have more say in
their appointment.
recognises the important role that the independent directors play in these
circumstances. Therefore it will also insist on a majority of independent
directors on the board where a controlling shareholder exists and introduce a
new dual voting procedure to allow independent shareholders to have more say in
their appointment.
The only effort in India that seems to be
along similar lines is SEBI’s recommendation
to the Ministry of Corporate Affairs last year that interested shareholders
must not be allowed to vote on related party transactions. However, this
recommendation appears to have been gathering dust, and its fate is yet
unknown. In any event, this recommendation does not find a place in the new
version of the Companies Bill, as Professor Balasubramanian laments in a
comment to an earlier post.
along similar lines is SEBI’s recommendation
to the Ministry of Corporate Affairs last year that interested shareholders
must not be allowed to vote on related party transactions. However, this
recommendation appears to have been gathering dust, and its fate is yet
unknown. In any event, this recommendation does not find a place in the new
version of the Companies Bill, as Professor Balasubramanian laments in a
comment to an earlier post.
To be sure, the approach of altogether
emasculating controlling shareholders has its fair share of detractors, as some
commentators advocate caution. The M&A Law Prof Blog highlights some of the
difficulties:
emasculating controlling shareholders has its fair share of detractors, as some
commentators advocate caution. The M&A Law Prof Blog highlights some of the
difficulties:
The idea here
appears to be to take the “control” out of controlling shareholders
and put more power to elect directors in the hands of minority/non-controlling
shareholders. That’s a pretty big move. By isolating controlling
shareholders from the boards of the companies that presumably own, that would
change the nature of a control position. I know the phone hacking scandal
was bad, but this seems like an over-reaction. So, going forward if you
own more than 50% of the stock of a UK listed firm, you’ll have scarcely more
influence over the direction of the firm than a minority shareholder? I
wonder whether, following implementation of these listing standards, control
premiums will go down for UK listed companies. Worth following as this
develops.
appears to be to take the “control” out of controlling shareholders
and put more power to elect directors in the hands of minority/non-controlling
shareholders. That’s a pretty big move. By isolating controlling
shareholders from the boards of the companies that presumably own, that would
change the nature of a control position. I know the phone hacking scandal
was bad, but this seems like an over-reaction. So, going forward if you
own more than 50% of the stock of a UK listed firm, you’ll have scarcely more
influence over the direction of the firm than a minority shareholder? I
wonder whether, following implementation of these listing standards, control
premiums will go down for UK listed companies. Worth following as this
develops.