General Counsel: The New Superhero?
Corruption allegations, license cancellations, retroactive amendments, policy paralysis, delayed land, company and tax laws, geoeconomic trouble, a slowing economy and growing public disenchantment - it is a veritable corporate Kurkshetra out there and fighting on the frontlines are General Counsels. Legal compliance, risk management, whist-blowing, crisis management and ethical governance - are GCs the new Corporate Superheroes?
Hello & Welcome to this year end special of The Firm. As we cross over to 2013, we'd like to reflect on the changing role of India Inc's General Counsels. To do that, I am joined by Ashok Gupta, of the Aditya Birla Group, Bharat Vasani of the Tata Group, Rajeev Uberoi of IDFC & Dev Bajpai of Hindustan Unilever (HUL).
Doshi: This year, you lost telecom licenses as collateral damage in the 2G scam case, Hindalco’s name was dragged into the Coalgate issue, you advised on the acquisition of an offshore asset in which there was a Chinese legal challenge and I think finally in the month of October you sent a notice to a filmmaker for using the Birla name in a Hindi film song pertaining to corruption. I think they used the Tata name as well. I am just using this to give people an idea of the various challenges that you and general counsels have had to deal with. Would you say your role has changed dramatically from what it used to be 5-10 years ago?
Gupta: I would say yes. The reason is everything is changing around us- laws, economy, expectation, from shareholders to stakeholders and when there are so many people looking at you, particularly listed companies and they are looking for mistakes not successes, then you need to be on your guard all the time. Now, the decisions are taken not purely from business or commercial point of view because there are implications like you mentioned and alluded to cancellation of licenses- this is not a simple decision- for instance issue of participating in auction is primarily driven by business and commercialization of course- that should be a way- but it will have its implication on other aspects. Are you sure this is not going to be cancelled, are you sure this is the right policy, are you sure that existing license which is cancelled and which we are challenging because we have got as per than prevailing policy will not get impacted?
Doshi: You will say the General Counsel is less somebody who does very technical legal vetting today and is a more holistic risk manager?
Vasani: More certainly. In fact my role – I started my career way back in 1980s, early 80s and I can see how it has evolved and now a significant number of decisions which I am called upon to take up are not necessarily technical, legal. It has larger implications from a public policy perspective.
Doshi: Give me examples.
Vasani: Public policy fallout of a possible decision in terms of whether a particular land which is allotted to you will be cancelled in a PIL or whether if you are entitled to a transponder on a satellite, whether if you get the transponder there could be a challenge in a High Court by business rival. There are host of such areas where you are told upon to opine which was not the case few years ago.
Ubroi: Taking cue from there, the outcome of the coal cancellation, my exposure is just to the power plants which need coal. So I need to understand what the cancellation is all about and how it is going to impact me and my portfolio or it could be regarding the telecom part. So our challenges come more from the changes in the regulations or the changes coming out of the court orders which indirectly or directly impact us.
Doshi: You have been spared the license cancellation, the coal mine issues and all the several politically connected, related issues that have come up for many companies in India Inc, which is not to say that you have not had a busy calendar this year but what I want to understand - you work within such structure, you are one such GC in the Unilever family of GCs- how does that change your role?
Bajpai: Particularly in our setup, within a GC set up structure, fundamentally the role is the same- meaning partnering the businesses but there are differences on account of approach, on account of priorities. The way it works is while I business partner with the CEO, I report to the GC in the UK and his priorities and the global priorities maybe different. For example typically, what bothers my global counterpart most is issues around potential high growth markets and the risks associated with those markets.
Doshi: Those are typically corruption risks; right?
Bajpai: It could be the environment risks as well, so not really confined to corruption only. Secondly, it would be in terms of code of business principles - ensuring that trainings are imparted on basic standards of conduct and business principles, the way you are conducting business across the global because the focus is on creating a culture which is uniform and across the globe and insisting that you have that.
The GCs role has changed in India but the West is still far ahead. For instance, a General Electric or even Coco Cola, the Audit Committee Charter makes it mandatory for the General Counsel to interact quarterly with the Audit Committee on the companies’ policies and processes. The need for such communication was codified by the American Bar Association in 2003. It mandates that the ‘General Counsel meets regularly and in executive sessions with a committee of independent directors to communicate concerns regarding legal compliance matters. In India these interactions are still at a nascent stage voluntary and informal.
Vasaini: It happens in a more unstructured way, there is no formal process but we do touch base and they do call you, especially in the companies where I am also on the board.
Doshi: Do you see that as conflict?
Vasani: Not necessarily, I don’t see it as a conflict, so long as we wear the same hat in terms of Director of that particular company
Doshi: In many companies like McDonald’s or GE, the Audit Committee has a special relationship with the GC, which is separate from what management has to say. So the management has no interference in that relationship. Have we reached there in India?
Uberoi: We have.
Bajpai: Not only is there a very flowing engagement with the Audit Committee, the legal function as a whole is almost quarterly reviewed by the Audit Committee and the Board.
Doshi: Is it right, you have to go before the Audit Committee on a quarterly basis and explain the decision that you have taken, the judgments that you have made?
Bajpai: Absolutely, all the litigations; other than litigation other issues, the statutory changes and the impact of that on the company.
Doshi: Is that for most group companies? Are you held accountable by the Audit Committee on a quarterly basis?
Doshi: Which Audit Committee?
Vasani: It is the concerned Law Officer and the Company Secretary of that particular company which would be held accountable.
Doshi: And for you it would be the Chairman’s office or the GCC in a sense?
Doshi: Would the same apply to you?
Gupta: I would just give you a perspective- this Audit Committee is concerned with proprietariness of financial accounts and that no misappropriation happen. Anything that is happening in the company, even though it would have taken a colour of litigation or a legal case, will have financial implications. Willy-nilly if you don’t bring it to the notice, then it is not complete in that sense. So, all CFOs are encouraged even today, to bring it to the notice even though many a times lawyers are not available in every company, they are encouraged to bring it about and discuss those. Many a times, I am invited as special invitee in the Audit Committee to explain the implication of it and company’s view and you are subjected to cross examination to find out whether you took a good rational view or not
Doshi: Are GCs held accountable? You hold your companies accountable to certain processes?
Uberoi: I am a financial institution -all my regulatory reporting which is the Reserve Bank report, SEBI report, twice a year my internal report- I am audited personally, in the sense, legal and compliance function is audited twice a year and it goes to the Audit Committee and it is presented there. I think the Audit Committee which we have has only independent directors there and so it captures all the legal and regulatory issues of the whole group.
Doshi: In the last two years we have seen so many corporate names dragged into allegations regarding a variety of different scams. Do you think it's a General Counsel’s failure then that those companies were not better protected or hadn't done – it’s a general answer I am asking you for, but hadn't done adequate due diligence or weren't prepared for what the outcome would be of let's say a faulty policy?
Gupta: There could be - I won't be able to say for each because companies…(Interrupted)
Doshi: Would you place some part of the blame on the GC?
Gupta: Possibly yes; I am not ruling that out. But we really don't know what happened - were they involved in the first place, not involved in that second place, were they party to the decision making? Did they anticipate? Did they have the skill? What level are they operating? Historically, GC were only legal officer who coordinate between management for the business people and the external counsel - that was the role, but that is now changing.
But it hasn't changed enough. In the US, corporate scandals such as Enron, Tyco and WorldCom have resulted in increase liability and accountability for General Counsels. The Sarbanes Oxley Act requires General Counsels to report any evidence of a material violation to the company's legal compliance committee. A violation of this requirement can result civil penalties and even censure. Besides Sarbanes Oxley, Securities laws of the United States apply equally to General Counsels. In 2004, Electro Scientific Industries (ESI's) General Counsel was charged with failure to provide information regarding a significant accounting transaction to the company's Audit Committee, Board and auditors. Having failed to fulfill his obligations as a 'gatekeeper', the GC consented to a USD 50,000 civil penalty.
Vasani: As of today, as we are talking, not a single statute in India recognizes GC as an officer and technically there is a vicarious liability clause in all the laws, which India has passed; 30,000-40,000 laws. It is typically directed toward Company Secretary and the officers of the company…(Interrupted…).
Doshi: So you are free if you give bad advice?
Vasani: If you contrast it with US, there are specific responsibilities and liabilities attached to the GC and GCs have gone to jail, which is not happening in India, which I suppose is a matter of time, which would happen.
Gupta: GC should be held accountable in business environment? Answer is absolutely yes, not withstanding the legal lacuna. Even today I personally feel and for that matter many of us feel accountable. (Interrupted…).
Doshi: No, that maybe your inner conscience speaking, I am just saying can a law hold you accountable for poor advice; for not doing the diligence that is needed to be done?
Gupta: Yes absolutely because if I am party to a business decision…(Interrupted…)
Doshi: Should GCs have a role or have a seat on boards?
Gupta: Answer is no in my view because when there is a detached view, an independent view, which CEO and the Chairman is entitled to take a different view. Otherwise, you are in the race of achieving that purpose without knowing the side-effects of it, consequences of it.
Vasani: I have a slightly different view on this in the sense that you don't really understand the business nuances unless you have a seat on the boards.
Doshi: You could look at it both ways - I would imagine it is an individual comfort level thing because there could or could not be conflict in this?
Uberoi: You should be a trusted advisor.
Doshi: The one other role that I wanted to talk about that the GC plays is I think - and all four of you would have played it in varying degrees to the laws that pertain to your sector is in making representations to the government regarding the laws that pertain to your sector. You can call it lobbying, you can call it public advocacy- you choose the word?
Vasani: My role in opposing the merger control regulations under the Competition Act. Has been much talked about in entire India and I think I can take some credit to bring about a regime which is much more a soft-touch approach to corporate India.
Doshi: As a public person how am I to view your intervention?
Vasani: I was protecting the interest of India because if the merger control regime - the way it was originally planned- was implemented, we would have had serious problem in doing any Merger and Acquisition (M&A) transactions.
Doshi: You feel equally comfortable Mr. Gupta when it comes to interfacing with the government on policymaking?
Gupta: We need to.
Doshi: But then would you call it lobbying, public advocacy? What role is the GC playing when he is doing this?
Gupta: Lobbying means when you are sub-serving your personal interest.
Doshi: How I am to know whether you are serving your personal interest in the suggestions you are making on a policy or you are serving a broader industry interest?
Gupta: The proof of the pudding lies in the fact that we operate through industry associations. We also many a times compare ourselves with outside business environment, commercial environment - we have that knowledge and therefore we are in a better position to tell the government that this is the law you need to make to be conducive. In fact I can give you an example - this Coalgate and telecom that you mentioned- I would largely blame this because you have been lagging behind or not formulating policy in time with international best practices.
Uberoi: Let me give you a current example. I think the whole country was looking forward to having the Infrastructure Debt Fund in place. We played a very critical role. Our CEO was involved with the government and I was involved in creating that document- how to structure it, talking to the Reserve Bank of India, talking to the Securities and Exchange Board of India (SEBI) how that structure will come. The investment bank is telling what will fly or not. Now I would not call it lobbying. I would say that it was a - objective was to create a framework through which the credit could flow from the infrastructure projects.
Doshi: We have sort of established how the role has grown. We have made the sort of suggestion that it is still not gone to where it is in the US. I want each one of you to tell me what more you think the GC's role should amount to in specific so we have a sense of what the next five years should ideally bring?
Bajpai: More of business partnering role. Proving your utility to the businesses- I think that's when you would be able to really establish a role.
Vasani: I would imagine that they will play more important role in public policy formulations which is where GCs are currently involved. They would be more involved in strategic decision making. Today, we maybe there from a legal perspective, from a more business perspective and going forward I would imagine that the Indian GCs may tomorrow occupy the CEO's position, which – hitherto there is a glass ceiling in India, which never has crossed, but I would imagine that would happen in India.
Doshi: What would you like to see change and maybe these two gentlemen do not feel it but especially in a promoter driven culture in this country whereby everybody finds it difficult to go up against the promoter, what kind of further empowering does the GC need?
Gupta: One is the position of GC in the system because there are two strong pillars of a strong corporate governance - finance and the legal- the obvious choice and you cannot undermine that position by having him at a very low position or reporting to somebody. In my view, there is a complete gap. If they want that high standard of corporate governance, you will need to put GC on a high pedestal. Second aspect what I fail to understand even today- I am paid by the company; naturally my interest would be to do something of promoting company’s interest. Still there is a mindset of people in the system, they tend to go immediately externally as if that is government approval.
Doshi: Till they do not get sort of approval from the external advisor, they do not believe in the GC’s point of view?
Gupta: Precisely and there is a gap – this mismatch which is happening and not allowing GC to play an important role must go.
On a final note, what are the key challenges that India’s GCs are anticipating 2013 will bring. Dev Bajpai is concerned about the government’s proposal to create an inter-ministerial advertising regulator.
Bajpai: I think there are multiple regulations which already exist with multiple regulators. Putting one more - which is a super kind of an authority- may not work instead we should support ASCI because it is something which is created by the industry, it is respected by the industry and it has a compliance of more than 80%. Secondly, the whole area of food laws- I think we have rightfully moved from a regime of prevention of adulteration to a regime of safety and standards, which is the right thing to do.
Doshi: What are you specifically expecting as a challenge next year?
Bajpai: I think what has happened basically is although the Law has been active and the regulations are also in place but there are a host of advisories that are issued and my last count was about 60-70 of advisories that have been issued which extend beyond the intent of the regulation. So I think implementing the present law, the new law in the right earnest and ensuring that -it is a State subject- so at the State level it gets implemented in the manner in which it has been envisaged is my expectation.
Uberoi: In the financial sector, I think, the Banking Regulation Amendment Bill which has done but how it is going to unfold, what the guidelines are going to be and last but not the least, we are very closely looking at the final guidelines coming on the Non-Banking Financial Companies (NBFCs), we being an NBFC and how we go forward.
Doshi: Game changers in 2013?
Gupta: Other than what Rajeev mentioned because it is going to impact the financial sector, there are two aspects- one is natural resources- the allocation; actually certainty of policies and complete clarity on this, there should not be an ambiguity. We would like that to happen. Whatever be the policy, we are not saying what policy is, if so long it is transparent. The second issue, to my mind, is competition because increasingly they will be vested with huge powers and unless there is a complete understanding how business operates, there could be severe accidents. That is my second concern.
Third is Environment Laws because a lot of things are happening on environmental front and again you need to strike a right balance between industry and environment.
Vasani: I think everything else is covered more or less on the spectrum. I would say that one area I would like to see reforms take place is the Arbitration Law that is amended in India in the line of SC judgment. I would expect the parliament to enact the Commercial Division Of The High Courts Bill which will fastrack some of the high value commercial disputes and I want the Judicial Accountability Bill also getting passed so that we discipline our judiciary in a manner- the entire set of judicial reforms to being the justice delivery system which is projecting India’s image very wrongly internationally needs to happen. When it comes to CCI aspect, a lot of guidelines need to come from CCI in terms of determining the horizontal mergers and vertical mergers and dominance and several other things which hopefully should happen.