[By Hansaja Pandya]
The author is a student at the Gujarat National Law University.
Stewardship is defined as the art of conducting, supervising, or managing of something entrusted to one’s care. The Stewards of commercial markets are institutional investors like the pension funds, mutual funds, insurance companies, asset management companies, investment advisors etc. They shoulder a responsibility to exercise their rights as shareholders of investee companies in order to ensure that their client’s money invested in various companies yields beneficial returns and the investee company does not mis-handle the money.
Hence, Securities and Exchange Board of India (SEBI) recently promulgated the Stewardship Code, 20191 (SEBI Code) for institutional investors in India. It sets out the principles that enhance investor engagement and transparency and define their ownership and governance responsibilities. It is expected that the SEBI Code will automatically check and balance the system of corporate governance and allow institutional investors to engage with the investee company in circumstances of poor financial performance of the company, corporate governance related practices, remuneration, strategy, risks, leadership issues and litigation. But these ambitious goal might not see the light of the day, because the SEBI Code is completely based on the United Kingdom Stewardship Regime.
India has straightaway transposed the UK style Stewardship Code2 without giving much thought about the difference in the corporate structures and motivations behind ensuring good governance practices. India has a concentrated shareholding structure wherein majority stakes are held by the promoters and their family members. UK on the other hand has a dispersed shareholding structure which allows institutional investors to hold significant share ina company and participate in corporate governance measures. In india, however, due to insignificant holding of institutional investors, their voices will be seldom heard.
Furthermore, the stewardship goals of India and UK are very different. UK law focuses on Enhancing Shareholder Value (ESV Principle)3 stating that the ultimate objective of shouldering stewardship responsibilities is to ensure protection of the interests of the ultimate beneficiaries of institutional investors and thereby ensure ultimate prosperity and welfare. Transposition of such a UK-style stewardship model is not suitable in India because India has a pluralistic corporate structure that focuses on interest of all stakeholders and not only the beneficiaries of institutional investors. For instance, the Indian regulatory and legislative practices resonate a broader and more inclusive corporate environment as provided under section 166 of the Companies Act, 2013 which emphasizes on the fiduciary duties of the director4 to,
“act in good faith promote the objects of the company for the benefit of its members as a whole, and in the best interests of the company, its employees, the shareholders, the community and for the protection of environment.”
Further the provisions of Corporate Social Responsibility (CSR) in the Companies Act, 2013 suggests heavy inclination towards the inclusive stakeholder approach that aims to benefit the society at large and not only the beneficiaries of institutional investors. It can be said that the Indian stewardship regime,
“…mistakenly concentrates monitoring in the hands of shareholders, where other stakeholders may have greater incentive to monitor, thereby unnecessarily relegating the importance of other stakeholders…”5
In an attempt to imitate UK Stewardship regime, the SEBI Stewardship Code has wrongly laid emphasis on benefiting the beneficiaries of institutional investors, without giving a second thought about the inconsistencies it would produce in the Indian corporate governance scenario.
Given these hesitations in the successful implementation of the SEBI Stewardship Code, 2019, the author has attempted to collate together some of the best stewardship practices from across the world that could be an inspiration for the Indian Stewardship Regime:
A. Netherland Stewardship Code:
India is a jurisdiction that follows a stakeholder approach where the final aim of good governance is to benefit corporate economy as a whole. But our Stewardship Code does not reflect this broader stakeholder concern. An answer to this problem lies within the Netherland stewardship Code which provides for responsible use of share rights because,
“it is key to creating long term value for the company and each one of its stakeholders, including shareholders”6.
Netherland, just like India is a jurisdiction that invests heavily into the broader stakeholder approach and the same is reflected in its stewardship regime. India could broaden the Stewardship principles to reflect this broader approach aimed at benefitting the society at large and not just the clients of institutional investors.
B. The South-African & Hongkong Stewardship Codes:
It is now an established fact that it is quintessential to integrate Environmental, Social and Governance (ESG) factors while making any investment decision in order to predict financial performance more reliably.7 The SEBI Stewardship Code fails to put enough emphasis on the ESG factors. Presently, the SEBI Consultation paper8 and the National Guidelines on Responsible Business Conduct makes it mandatory to disclose compliance with ESG norms. But these measures lacks the force required for proper adherence and implementation of ESG factors, because no penalty for disobedience is prescribed. South African Stewardship regime provides a solution to this lacuna. They have put the requirement to comply with ESG norm as a part of their hard law under their Pension Funds Act, 1956. Regulation 28 issued by the South-African Minister of Finance under their Pension Funds Act now states in the preamble itself that,
“prudent investing should give appropriate consideration to any factor which can materially affect the sustainable long-term performance of a fund’s assets, including factors of an environmental, social and governance character.”9
Hongkong Code also puts heavy emphasis on the adoption of ESG norms in its Stewardship Code by devoting an entire principle highlighting the importance that ESG norms have on companies goodwill, reputation and performance.10 Both these countries make non-compliance with ESG norms punishable.
India could adopt a similar method and instead of just making a passing reference at the ESG norm in a “Code”, they could be incorporated as a hard law in the SEBI Rules and Regulations, violation of which would attract penalty. ESG norms is of utmost importance to the Indian scenario also because it aligns well with the all-rounded stakeholder approach followed by the country.
C. The Singapore and Japanese Stewardship Codes:
India predominantly has a concentrated shareholding structure with ownership or majority shares held generally by the promoter group. The promoters are also on the board of the company and deeply involved in the day-to-day management of the company. The definition, responsibilities and duties of stewardship must expand beyond institutional investors to cover directors and promoter groups as well. Japanese Stewardship Code has done exactly that and it provides a very valuable insight to India to learn from. The Japanese Stewardship Code has ensured that the stewardship duties of institutional investors and the board of the company are complementary to one another. This ensures that, the board of the company takes an equal responsibility, along with the institutional investors to act as stewards of the company. Such equal participation by internal management and external investors will ensure good governance practises.11 Further it ensures that decisions on key policy and business matters are the responsibility of the board.12 Placing this restrain on interference by investors draws a line and prevents chances of negative investor activism or interference and reduces the chances of investors micro-managing the firms.
D. Canadian Stewardship Code:
Canadian Code provides an effective solution for India to balance both stakeholder and shareholder-based approach at the same time. The Canadian Code aims to engage institutional investors in matters of governance for not only maximising the long-term value of the company, but also to,“…improve the effectiveness of the board, its committees and its directors in minimizing risk…”
This statement has been put in the ‘aims & objectives’ of the Canadian Stewardship Code.13 It requires the institutional investors to ensure that the board of the company acts transparently to benefit the entire company as a whole and not just the beneficiaries of the investors. It leads the regime away from a myopic view which focuses only on beneficiaries of investors, and moves towards a more broader perspective of benefiting the company and the society as a whole. On the same line, India could consider amending the ‘Statement of Reasons and Objectives’ or adding a principle to this effect in the SEBI Stewardship Code of 2019 to ensure that the Code is more suited to the Indian corporate regime.
The suggestions made herein, will, in the opinion of the author make the stewardship code more effective and suitable leading to effective corporate governance and responsible shareholder engagement enhancing the attractiveness of Indian capital markets for domestic and international investors alike. The SEBI Code must be tailored to take into account the special features of the Indian corporate governance including the prominent role of promoters and nature of conflicts of interest, otherwise it will wither on the vine.14
The author does not deny the fact the British experience in implementing the stewardship code is valuable to India. It provides India an oppurtunity to learn from UK’s mistakes in putting their code into practice. But the very argument of the author goes that India must not transpose the exact UK based stewardship principles into Indian practice. The UK code could be used as a starting point, but the principles must be modified to suit the Indian scenario. Further, India must look beyond UK, to the practices of other countries, as listed above, who have successfully implemented the stewardship regime and adopt, experiment and modify their principles according to the Indian corporate governance regime.
As a final analysis, the Indian Stewardship Code and more specifically the new SEBI Stewardship Code, 2019 must be regarded as a means to an end and not an end in itself.
1 Dr. Julia Mundy, ‘Is the Stewardship Code fit for the Purpose?’ (2015) 15(1) CIMA Global Academic Research Program
2 UK Stewardship Code, 2012, https://www.frc.org.uk/getattachment/d67933f9-ca38-4233-b603-3d24b2f62c5f/UK-Stewardship-Code-(September-2012).pdf.
3 Companies Act 2006, sec 172 (UK)
4 N Narayana v. AO, SEBI (2013) 12 SCC 152
5 Umakant Varottil, ‘Shareholder Stewardship in India: The Desiderata’ (2020) NUS Law Working Paper Series < http://law.nus.edu.sg/wp> accessed 15 October 2020
6 Alice Klettner, ‘Impact of Stewardship Code on Corporate Governance & Sustainability’ (2017) BSUT <https://www.researchgate.net/publication/325358712> accessed 13 October 2020
7 Carmen Juravle and Alan Lewis ‘Identifying Impediments to SRI in Europe: A Review of the Practitioner and Academic Literature’ (2008) 17 ER 285
8 Securities and Exchange Board of India, Consultation Paper On The Format For Business Responsibility And Sustainability Reporting <https://www.sebi.gov.in/reports-and-statistics/reports/aug -2020/consultation-paper-on-the-format-for-business-responsibility-and-sustainability-reporting.html> accessed 11 October 2020
9 Pension Funds Act, 1956 (South Africa)
10 Hong Kong Stewardship Principles of Responsible Ownership, 2016
11 Gen Goto, ‘The Logic and Limits of Stewardship Codes: The Case for Japan’ (2018) CALS Working Paper Series, <http://law.nus.edu.sg/cals/wps.htm> accessed 7 November 2020
13 Canadian Stewardship Code, 2017, https://ccgg.ca/stewardship-principles-endorsers/.
14 Guy Jubb & Mohanty, An India Stewardship Code: Imperatives and Challenges, (National Stock Exchange, October 2017) <https://www1.nseindia.com/research/content/res_QBOctober17.pdf> accessed 6 October 2020