Corporate Governance Through Better HR Practices

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.

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.

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.