articles

January 31, 2017

Corporate Governance Through Better HR Practices


- Anubhav Kapoor, General Counsel and Company Secretary [ Tata Technologies ]

Anubhav Kapoor

The Companies Act 2013 (the “2013 Act”) has eased the way of doing business in India through better governance, enhanced transparency, increased accountability, better shareholder democracy and facilitation of corporate social responsibility (CSR). It marked a paradigm shift in India’s corporate law regime and made the regime more modern and contemporary. It moved the mindset from a regime of control to that of liberalization and self-regulation, something that the corporates needed to compete globally.

While it is generally accepted that the Companies Act 2013 has improved corporate governance practices in India and beneficially affected HR management and policies and outcome, much depends on the awareness, understanding and implementation by HR professionals who translate these governance practices into positive outcomes for their organizations.

However, reforming the Companies Act was not easy. The entire journey for reviewing and redrafting the Companies Act of 1956 to the Act of 2013 took almost 10 years, several committees and a long drawn and painstaking consultative process with various stakeholders. A journey that perhaps began with the publication of a “Concept Paper on new Company Law” issued by the Ministry of Corporate Affairs Government on August 4, 2004 concluded after several twists and turns on August 30, 2013, when the Act was notified in the Gazette of India as the Companies Act 2013.

What often gets missed out is the inclusiveness of the process where opinions of industry, professional bodies, corporates and stakeholders were invited and detailed deliberations were done right from the beginning. The review and redrafting of the Companies Act 1956 taken up by the Ministry of Corporate Affairs were at every stage based on a detailed consultative process with stakeholders. Inputs received were put to a detailed examination in the Ministry.

Actually, in my opinion, the extended period of redrafting and review made the 2013 Act more practical by including many industry and global best practices and addressing the vulnerabilities of the real world.

One area that has been positively affected is the human resources (HR) function. The 2013 Act, through its provisions like those related to Independent Director, Key Managerial Personnel, Appointment of Board and Corporate Sustainability, has empowered HR professionals to implement best practices within their organizations.

Senior Management Engagement

Nomination and Remuneration Committee

Section 178 of the 2013 Act read with the relevant rules thereunder mandates the Board of Directors of all listed and large public companies to constitute a Nomination and Remuneration Committee (NRC) of the Board.

The 2013 Act further lays down specifically under Section 178 that the NRC shall be responsible for the identification of people who are qualified to become directors and who may be appointed in the senior management in accordance with the criteria laid down and recommend to the Board their appointment and removal. The NRC shall recommend criteria for remunerating the directors and senior management and carry out performance evaluation of every director.

Senior Management for this purpose means personnel of the company who are members of its core management team excluding Board of Directors and comprising all members of the management one level below the Executive Directors, including the functional heads. The senior management plays a crucial role in governance of companies. They are presumed to keep the management practices in the best interest of the company and the public.

Given the above, it may become imperative for HR heads to now work very closely with the NRC. The NRC has now been better empowered and has a lot more to say as compared to the earlier Act in matters of the appointment of the Board, senior management, their evaluation and consequently the determination of their remuneration and compensation criteria.

Independent Directors

Section 149(4) of the 2013 Act lays down specific criteria where it is imperative that an independent director is free from significant beneficial trappings of a company and making sure that the best interest of the company overrides the personal interest of directors.

The 2013 Act institutionalizes appointment of Independent Directors within the corporate governance framework. Independent Directors as the name suggests bring in valuable, independent, an objective judgment, view and opinion to the board of directors. They play crucial role in the governance of the company by raising important questions on the functioning of the company and keep the management vigilant.

This requires HR professionals in companies to be well informed of these requirements as even in advertent breach of these provisions may be fatal to the appointment/ independence of the director.

Key Managerial Personnel (KMP)

The 2013 Act has used the term “Key Management Personnel” (KMP) to define the top-level executive management of a corporate. While the Board of Directors is responsible for providing an oversight, the KMP are responsible for laying down strategies as well as their implementation.

Prior to the 2013 Act, only the managing director, whole- time director and manager were recognized as managerial personnel. The 2013 Act under Section 2(51) has introduced the concept of Key Managerial Personnel, which not only covers the traditional roles of the managing director and whole-time director but also includes functionally important figureheads like Chief Financial Officer, Chief Executive Officer and Company Secretary. These inclusions are in line with global trends.

HR managers are required to align their practices with legal requirements and ensure good governance by adhering to the provision of the 2013 Act. For the appointment of KMP, HR managers shall go through the criteria of appointment decided by the Nomination and Remuneration Committee. Additionally, HR shall ensure that a whole-time KMP of any company shall not hold office in more than one company except in its subsidiary company. The terms and conditions set out by the HR while appointing KMP shall be sent to the Board for its review and approval.

Woman Director(s)

Pursuant to the proviso to Section 149(1) of the 2013 Act, read with Rule 3 of The Companies (Appointment and Qualification of Directors) Rules 2014, every listed company and every other public company having a paid-up share capital of ` 100 crores or more or turnover of ` 300 crores or more shall appoint at least one woman director on the Board of the company. This is an important step forward to promote women in senior management. UN Women’s Empowerment Principles direct the establishment of high- level corporate leadership for gender equality and the Government of India has also endeavored for many years’ empowerment of women through various legislations.

Induction, Training and Development

Under the governance practices stipulated in the 2013 Act and Clause 49 of the Listing Agreement, companies should conduct “familiarization programs” for independent directors so as to provide insights about the background of the company, their roles, responsibilities and so on. Each independent director has to undergo an orientation program or knowledge-sharing session.

The HR manager should arrange knowledge-sharing programs for its directors. These programs and sessions shall pave the way to broaden their understanding of the company, its business and its operating environment. HR managers are required to play a vital role by institutionalizing leadership development programs among the key people of the company in a defined time.

Compensation

Under Section 178 of the 2013 Act, the NRC has been further entrusted with the responsibility of formulating the criteria for determining qualifications, positive attributes and independence of directors and recommending to the Board a policy relating to remuneration for directors, KMP and other senior management personnel.

corporategovernance

While formulating the policy, the NRC shall ensure that:

1. The level and composition of remuneration are reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

2. Relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

3. Remunerations to directors, KMP and senior management involve balance between fixed and incentive pay reflecting short-term and long-term performance objectives appropriate for the working of the company and its goals. This policy shall be disclosed in the Board’s report.

It is very important for HR managers to know these provisions for enabling them to determine the compensation of managerial personnel. Compensation is a critical part of strategic human resource management. A systematic approach to compensation helps to attract and retain competent managerial personnel. Some considerations that HR professionals should be aware of are as follows:

1. Section 196 of the 2013 Act deals with the appointment of executive director, while Section 197, applicable to public companies only, deals with the overall maximum managerial remuneration including payment of commission and sitting fees.

2. Section 197 read with Schedule V also deals with managerial remuneration in case of absence or inadequacy of profits.

3. In light of the recent amendment to Schedule V of the 2013 Act, the HR managers are required to be aware of the increased limits of managerial remuneration.

4. Amount paid to directors for rendering services in other capacity (professional services) and in the opinion of Nomination and Remuneration Committee or Board of Directors, if any, the director possess requisite qualification for practice of profession shall not be included in computation of remuneration payable to directors as per Section 197.

5. While hiring Independent Directors of the Company, HR managers should note that they are not entitled to any stock options of the company.

Vigil Mechanism and Whistleblower Policy

As per Section 177(9) of the 2013 Act, every listed company and companies that accept deposits from the public or that have borrowed money from banks and public financial institutions in excess of ` 50 crores shall establish a vigil mechanism for their directors and employees to report genuine concerns or grievances. The company’s Whistleblower Policy has to be reviewed and amended to align it with the requirements of the 2013 Act and Clause 49 of the Listing Agreement to ensure the highest standards of professionalism, honesty, integrity and ethical behavior through a robust vigil mechanism. It is the key mechanism available to employees to report the violation of personnel policies of the company, unethical behavior, suspected or actual fraud and violation of code of conduct.

Further, companies are required to include in their Annual Report the number of cases filed, if any, and their disposal under the Sexual Harassment of Women at Workplace (Prevention, Prohibition and Redressal) Act 2013.

HR professionals play a key vital role in such mechanism. HR should spread awareness about the Whistleblower Policy, the rights of the employees and the grievance mechanism available to the employees. Every employee has access to the HR department where they can report violation of policies, unethical behavior, etc. as stated above. HR department shall establish the ethics committee to receive and resolve the grievances received from the employees. Further, reports of the ethics committee need to be placed before the Audit Committee on regular basis.

Transparency Norms

Just as profits drive business, incentives drive the managers of business. Not surprisingly then, in a fiercely competitive corporate environment, managerial remuneration is an important piece in the management puzzle. While it is important to incentivize the workforce performing a challenging role of managing companies, it is equally important not to go overboard with the perks and the pay. In India, to keep a check on unnecessary profit squandering by companies and simultaneously to ensure adequate and reasonable compensation to managerial personnel, the 2013 Act intervenes to do the balancing act.

As per Section 197(12) of the 2013 Act read with relevant rules, every listed company shall disclose the ratio of the remuneration of each director to the median employee’s remuneration. To provide correct information, the HR manager of a listed company is required to be aware of disclosures to be made in the Board’s report under the rules prescribed by the Central government as follows:

1. ratio of the remuneration of each director to the median remuneration of employees of a company for the financial year;

2. percentage increase in the remuneration of each director and CEO in the financial year;

3. percentage increase in the median remuneration of employees in the financial year;

4. number of permanent employees on the rolls of a company;

5. explanation on the relation between an average increase in remuneration and company performance;

6. comparison of the remuneration of key managerial personnel against company performance;

7. average percentile increase already made in the salaries of employees other than those of managerial personnel in the last financial year and its comparison with the percentile increase in the managerial remuneration and justification thereof and point out if there are any exceptional circumstances for increase in the managerial remuneration;

8. comparison of each remuneration of key managerial personnel against company performance;

9. key parameters for any variable component of remuneration availed by directors;

10. ratio of the remuneration of the highest-paid director to that of employees who are not directors but receive remuneration more than the highest-paid director during the year;

11. affirmations that the remuneration is as per the remuneration policy of a company.

The HR manager is required to be aware of the above provisions and provide the correct information to be disclosed in the Annual Report.

Corporate Sustainability

Corporate sustainability essentially refers to the role that companies can play in meeting the agenda of sustainable development and entails a balanced approach to economic progress, social progress and environmental stewardship. CSR is a concept whereby companies serve the interests of society by taking responsibility for the impact of their businesses on customers, employees, shareholders, communities and the environment. India is the first country to legalize the concept of corporate sustainability through the introduction of CSR in the 2013 Act, which has institutionalized the concept of corporate sustainability.

Section 135 of the 2013 Act read with the rules framed thereunder mandates every company having a net worth of ` 500 crores or more or a turnover of ` 1000 crores or more or a net profit of ` 5 crores or more during any financial year to constitute a CSR committee of the Board.

The 2013 Act stipulates companies to spend at least 2% of their average net profit for the immediately preceding three financial years on CSR activities as mentioned in schedule VII. HR department plays a key role in integrating the sustainability theme with the goal of the organization and hence brings about alignment in employee behavior. The HR department should comprehend sustainability in the context of business, build sustainable HR systems, processes and develop ability to drive organizational change. HR plays a key role in helping a company to achieve its CSR objectives. Sustainability positively impacts the employees and other stakeholders. Employee involvement is a critical success factor for CSR performance. HR department revolves around people management, which in turn drives people towards a sustainable culture and brings about an enduring change in the organization.

Conclusion

Generally, it is accepted that the 2013 Act has improved corporate governance practices in India and stakeholders’ relationship within organizations and had consequent impact on HR management and policies and outcome. However, much depends on the awareness, understanding and implementation by HR professionals who translate these governance practices into positive outcomes for their organizations.

Disclaimer – The views expressed in this article are the personal views of the author and not of the company. They are purely informative in nature.



Related Post

follow us

Publication & Enquiries

phone icon  +91 8879635570/8879635571

mail icon   editor@legalera.in