MUMBAI, July 29: The chairman of Industrial Development Bank of India (IDBI) S H Khan came down heavily on family-run companies for lack of ``corporate culture'' and ``running their companies as proprietary concerns''.

``The CII paper (on corporate governance) fails to mention the negative approach of many family managed business groups towards corporate governance who consider their companies as proprietary concern and run them as such.

Many of these companies lack the corporate culture and it is difficult for any non-executive directors to be effective. And they are able to do this because there is no credible threat to the management under the current legal environment,'' Khan said at a seminar on corporate governance organised by the Confederation of Indian Industry (CII).

The IDBI chief said the requirement of appropriately balanced composition of board should apply equally to all listed public limited companies. ``It is not going to be easy to enforce this requirement in actual practice. As things stand, barring a few enlightened groups, the boards of most corporates are packed by the family members and business associates of the promoters and the so-called independent directors are really not independent in the true sense of the term,'' Khan said.

Continuing his attack on such companies, he said ``it is common knowledge that in the case of very large number of companies, board meetings are held for statutory compliance. Adequate notices is not given for board meetings, agenda papers are not circulated in advance and many matters of vital nature are not brought before the board.''

Khan supported proposals like board meetings of minimum six times a year, no single person should hold directorship in more than ten companies and full agenda of the board meeting. ``Matters like inter-corporate loans, transactions with sister companies, formation of new companies/subsidiaries and report on compliance with statutory/regulatory requirements should also be placed before the board,'' Khan said.

The IDBI chief disagreed with the demand of a CII paper that FIs should desist from demanding a seat on the board so long as their dues are being paid in time. ``This proposition is not acceptable as FIs are rarely pure creditors. Often their stake in the form of debt and equity far outweigh the stake of promoters in a project. In case the company falls sick, the burden of sacrifices fall mainly on secured creditors,'' he said.

He said the number of nominee directors of financial institutions on the boards of companies is expected to come down significantly. Under a new set of guidelines which are being evolved, the threshold exposure limit for appointment of nominee directors would be increased.

According to Khan, the move is to reduce the number of nominees of financial institutions on the board of a company. ``The role and responsibility of a nominee director are being more clearly outlined and a mechanism is being introduced within which an institution could interact with the nominee directors more effectively,'' he said.

Touching upon the accountability of a nominee director, Khan said ``a nominee director is like any other director of the company and his accountability is no more or less than any other non-executive director. The board is expected to lay down proper systems, internal control mechanism etc to ensure that the affairs of the company are run on sound business line without infringing on the law of the land.''

Without mentioning the ITC affair (where FI nominees are being charge-sheeted by the Enforcement Directorate), Khan said ``it cannot by any stretch of imagination prevent frauds or violation of law by a company's executive.

The nominee director is not expected to take upon himself the role of an investigating agency and unearthing of violation of laws by the executives/employees of the company.''

Copyright © 1997 Indian Express Newspapers (Bombay) Ltd.