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NEW GOVERNANCE ORDER

New Governance Order: Potential Implications

Implications of the Bill for governance:

Independent directors: Corporate

boards will have to have a third of their members as independent members. They are more stringently defined and their tenures will be limited to two terms to a maximum of 10 years. An independent director can hold a maximum of 20 directorships.

Corporate Social Responsibility:

The Bill comes close to making 2 percent spending on CSR mandatory. However, it does not define CSR. Moreover, if a corporate does not

Sepcial
ARTICLE

Praveen Gupta Chief Executive Officer, Raheja QBE General Insurance Co. Ltd., Windsor House, 5 Floor, CST Road, Kalina, Santacruz (East), Mumbai - 400098. praveen.gupta@rahejaqbe.com
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The recent passage of the Company Bill in India has had a subdued response from the Indian insurance industry. The reasons are understandable but the implications in terms of threats and opportunities are what need to be realised and fathomed. Given this backdrop it is indeed interesting that the Insurance Institute of India and the Institute of Company Secretaries have joined hands to launch a diploma course in governance and risk management. It is not just the Bill alone impacting the governance space but several forces unleashed in our socioeconomic-political arena.

spend the amount it must explain why in the annual report.

Women directors: The world over the

endeavour is to diversify the boards with more women representatives. However, even in the worlds best known companies women account for only 11 percent of total directorships. In India, a sample of 89 companies with more than USD 1 billion in market valuation, the percentage of women is less than 7 percent. The challenge here would be in terms of identifying and fast tracking the short supply of talent.

Class action suits: One of the most significant provisions in the Bill is the enabling of tort action and class action suits. We saw the frustration of Indian retail shareholders of Satyam Computers for their inability

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to bring class action against the promoters, while Mahindra Satyam settled lawsuits of shareholders in the US and UK. The new provision makes it possible for shareholders of government owned companies to sue the government. Class action suits have to be filed before National Company Law Tribunal(NCLT) first. The formation of NCLT is work in progress.

and sexual harassment are major triggers for not just the multinationals but increasingly domestic business entities. Class action: Just like the first two triggers in this list, class action too would have implications for D&O underwriters. Unlike the two the mechanism for this one for the domestic market is yet to be in place. However, any client with a global listing already faces this possibility. With it comes the cost of litigation.

Contract certainty: Increasingly the policy wordings of insurers will need to stand the legal challenges of our courts. As and when insurers list, their governance levels would also be susceptible to any vulnerabilities in this space.

M&A/ Run-off management: Consolidation of the insurance markets always sets into motion mergers and acquisition and the need to manage run-off portfolios. That is when many a can of worms open up. The valuation and disclosure aspects may be challenged by entire gamut of stakeholders.

Key Managerial Personnel: The KMP in relation to a Company are defined to mean the CEO or the MD; the Company Secretary; the WholeTime Director; the CFO and such other officers as may be prescribed.

Insolvency: While insolvency is a bad word in our environment, an improper disclosure can lead to denial of potential claim by D&O underwriters.

Dearth of actuarial resource: A major supply side issue puts the entire insurance business under pressure. Not just on the pricing front but claims reserving side, as well. The recent ballooning of the Motor TP Pool is symptomatic of this condition. Boards of insurers would need to be very wary of this not repeating again.

Auditors: The Bill prescribes some very strong measures in terms of fines, penalties and right of stakeholders of a Company to claim damages or compensation in the form of a class action. The Bill also stipulates the constitution of the National Financial Reporting Authority (NFRA) to oversee the quality of service of professionals associated with compliance of accounting and auditing standards.

Independent directors beware: As underwriters we can sense the growing anxiety of professionals whilst considering a position of independent director. Look before you leap is an advice you may at your diplomatic best may wish to render. A good quality D&O cover may very well become a good reason to woo a good professional as an independent director.

Fault lines: As insurers and related businesses list, a new breed of analysts will surface. Projections and assumptions on valuations and the likes of such entities will be vigorously challenged. Making their boards susceptible to the fault-lines.

Government entities: Level playing would mean government owned companies would be at par with any other company in terms of governance standards. Likewise they would be equally vulnerable for their errors and omissions.

Implications for insurers:

Corruption/ Bribery: World over and particularly the markets that most Indian corporates deal with, this is a major challenge. Any shortcomings on part of a corporate would have fiduciary implications.

The advent of the new Company Act, still a work in progress, poses both threats and opportunities to Indian insurers. The emerging risks open up tremendous opportunities for both D&O liability and Professional Indemnity insurance. No

Regulatory actions: Could become a major set of triggers for claims under fiduciary breaches.

Employment practices/ sexual harassment: Corporate manslaughter

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independent director worth his or her salt would like to join a board, howsoever illustrious, without a protection in the form of a D&O cover. In the present barely under 10% of all Indian listed companies buy insurance to protect its directors and officers. Many of those who do buy have questionably low limits not even adequate to fund potential legal expenses. Gatekeepers of governance like the Company Secretary will of course need their share of protection too. However, independent CS and auditors will be prone to professional errors and omissions. Hence a crying need for PI insurance. Companies buying D&O cover would not be required to allocate the premium expense as remuneration to covered individual, unless the individual is found guilty. While the arrival of the new Company laws has immediate implications on the fiduciary and governance plane, this need to be also examined in context of a larger

unfolding transformation. Here are some key drivers:

Statutory push: This is one class which will benefit most from such initiatives. There are great expectations from SEBI to make D&O mandatory.

Lifestyle: Growing middle class; demographic dividend churns youthful population; increasing buying power and impinging global influence; openness to experiment.

Right to information (RTI): Imposition of this form of disclosure is indeed a silent revolution forcing governance particularly on the realms hitherto inaccessible.

Awareness: An all-pervasive social media and an assertive mass media all operating on a virtual basis. Enlarges the canvas for libel and slander.

Conclusion:
The emerging governance order - partly driven by the new Company Law and the rest by multiple drivers jointly and severally impacting India - will present challenging opportunities and threats to its insurance industry as much to the fiduciary India. The time for liability classes of insurance to play an increasing role in the daily lives of existing and potential insureds has arrived. The relative shrinkage of property classes and the rapid growth of motor and health segments present a backdrop in a state of flux. Learning from examples of Enron let us remember that physical assets of a business entity may still be around but the brand may disappear due to reputation and governance deficits. While the liability class of portfolio is set to grow, let us also remember that this is a long-tail portfolio which must be priced, underwritten and serviced by specialists or with specialist assistance. We want the insurers to be around when the claims come. The collaboration between the two Institutes will hopefully be a window through which we will continue imbibing the potential implications from the gatekeepers of governance. TJ

Consumerism: Informed buyer demands choice and begins to hanker for quality and consistency. Functional consumer courts. A wide definition for services. Growing number of actions on account of faulty products and services. Increasing number of claims under medical malpractice against doctors and medical establishments.

Globalisation: Indian vendors are regularly sued for errors and omissions. The learning is percolating within the overall environment. Undue exposure of some trades to the North American jurisdiction and its unique challenges.

The emerging governance order - partly driven by the new Company Law and the rest by multiple drivers jointly and severally impacting India - will present challenging opportunities and threats to its insurance industry as much to the fiduciary India.

Intellectual Property: The internet and accessibility via hand held devices suddenly unleashes both development and application of a vast hinterlands creativity across the global village. Similarly, cyber crime can wreck far-reaching damage and cause serious privacy intrusions like never before.

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