[Priya Garg is a 5th year student at West Bengal National University of Juridical Sciences (WBNUJS), Kolkata]
When Ratan Tata, the then Chairman Emeritus of the Tata Group of companies, allegedly exercised his influence over the Group’s directors to dethrone its then Chairman, Cyrus Mistry, because of the former’s dissatisfaction with the latter’s functioning,[1] a new corporate governance issue came to the forefront. It was about the relationship that should exist between a company’s senior management like its Chairman, Managing Director, Vice Chairman, Chief Executive Officer, Whole Time Director, among others and its Emeritus—Emeritus being an honorary position, solely governed by a contract with the company in the absence of a provision in this regard under the Companies Act, 2013 (the “Act”).[2] Usually, under a contractual arrangement with the company, the Emeritus, who is often the company’s past key official , gets the privilege to participate in the company’s board meetings without having the capacity to vote therein.
In the Indian context, the issue arising with respect to the suggested nature of coordination and relationship between a company’s Emeritus and its key official deserves an in-depth discussion. This is because in India, companies, including listed ones, have their shareholdings concentrated in the hands of a few shareholders, who are mostly members of one family, making such shareholders the controlling shareholders. In such companies, the position of Chairman or that of other such key officials can be a prominent one if the key official is also one of the company’s controlling shareholders or their representative.
In such commercial entities, the Emeritus is also likely to continue possessing influence despite retirement as the company’s key official. This is because in most cases, firstly, the person has served the company exceptionally well while being a key officer and, secondly, is one of its controlling shareholders or their representative.
Hence, in such corporate entities, the probability of the Emeritus questioning the decisions of the company’s key officials and thereby of a tussle arising between the Emeritus and a key official is high. This may be true not only when the Emeritus and the key official belong to different business families and shareholding groups but also when they hail from one family. Moreover, this issue deserves a careful handling because Indian companies are increasingly using the designation of Emeritus. The solution does not lie in discouraging the creation of this berth because of the utility of having this position. For instance, it may ensure that the retiring key official continues to remain formally connected with the company and can thereby mentor the company’s newly anointed successor.
Resultantly, under the Act, the circumstances in which a company’s Emeritus could legitimately or justly interfere with the decisions of its key officers should be laid down. In relation to the Emeritus, such a provision cannot be located in any other jurisdiction. Therefore, on this front, India can lead by stating under the Act that the Emeritus’s interference stands justified only in cases where the decision of any of the company’s key official appears to be prima facie and blatantly wrong or mala fide. The meaning and scope of this standard could be similar in its essence to that of the business judgement rule[3] that exists under commercial law parlance to guide the judiciary regarding situations in which judges’ intervention into a key official’s functioning would be encouraged. Broadly, the business judgement rule prevents the judiciary from reassessing or second-guessing the merits of the decisions taken at any company provided they are taken by its company’s officer as a reasonable person and in good faith.
This legislative reform regarding the Emeritus would immunise any company’s key officials against the possibilities of interference by its Emeritus. The amendment would simultaneously equip the Emeritus to blow a whistle if the company’s management goes unreasonably and excessively wrong while steering the company. Additionally, the modification should apply not only to the Emeritus formally appointed as such but also to the person, who without being enthroned as such, acts in effect as the company’s Emeritus. This should be to cover incidences such as the one in which the ex-Chairman of Infosys, Narayana Murthy, by openly rebuking the policies of the company’s current key officials and by influencing the company’s governance as a result, began acting as the its Emeritus for all practical purposes without being anointed as such. Having such a wide definition of Emeritus under the Act may thereby generate a cause of action in favour of the company’s key officials against former company leaders for excessive interference wherever it exists. The broadly termed definition may also give interested outsiders a ground to sue as the Emeritus any of the company’s key officials, provided they could establish that the statutory standard of the key official having taken a prima facie and blatantly wrong or mala fide decision has been met.
These reforms would go a long way in addressing ‘one of the least’ discussed corporate governance issues that may arise with far greater frequency and probability specifically in Indian companies by virtue of many of them being family businesses.
– Priya Garg
[1] Simon Atkinson, Tata Sacking: Cyrus Mistry was ‘Lame Duck’ Chairman, BBC NEWS (26/10/2016), available at https://www.bbc.com/news/business-37775458; Mohandas Pai, ‘Superstar chairmen across corporate India don’t want to give up power’, rediff.com (03/11/2016), available at https://www.rediff.com/business/special/superstar-chairmen-dont-want-to-give-up-power/20161103.htm; Megha Mandavia, Cyrus Mistry’s presence in Tata Group boards is disruptive: Ratan Tata, The Economic Times (08/12/2016), available at https://economictimes.indiatimes.com/news/company/corporate-trends/cyrus-mistrys-presence-in-tata-group-is-disruptive-ratan-tata/articleshow/55856940.cms.
[2] See Srinivas Gunta & N. Ravichandran, Infosys: Transition at the Top, 3(2) The Indore Management Journal 38, 43 (2011).
[3] Adina Ponta, The Business Judgement Rule – Approach and Application, 5 Juridical Tribune 25, 25-27 (2015); Fidaali Moiz Mithiborwala v. Aceros Fortunate Industries Pvt. Ltd., (2017) 2 Comp LJ 108.