Review of SEC regulations on directors’ appointments

By Sentil Nadaraja

In 2023/24, the Securities and Exchange Commission (SEC) and CSE introduced a set of new regulations aimed at improving corporate governance. While some of these regulations were progressive, aligning certain listing rules with banking regulations—a move based on the assumption that companies, like banks, operate on public deposits—there are two specific rules that require immediate review. 

These rules, while potentially useful in the long term, are impractical in the current economic context, especially given the country’s default status. The situation is further complicated by policy uncertainty with Marxist ideologies influencing policy decisions, despite a shift in chamber, consultancy/audit firm executives from one administration to another like our Parliamentarians, perhaps giving new meaning to bipartisanship and serving the interest of the country.

Here are the key regulations that need urgent reconsideration:

Loss of directors’ independence after 9 years

One of the most contentious regulations is the requirement that directors lose their independent status after serving on the board for nine years, similar to the rules for banks. Historically, boards had the flexibility to make these decisions based on the director’s contributions and the needs of the company. This rule has caused considerable disruption, as boards are now constrained in their ability to retain experienced directors who add significant value.

The previous system allowed companies to assess a director’s productivity and effectiveness, making changes when necessary. Given the current economic climate, flexibility is crucial, and companies should be allowed to retain long-serving, capable directors if they continue to contribute positively. In reality, underperforming directors would be removed by the board regardless of tenure. Therefore, this regulation is premature and better suited for implementation in a more stable environment, perhaps in five years, once the economy has recovered and companies can manage such rigid compliance structures.

Appointment of committees and structures

The new SEC rules also mandate the creation of specific committees and governance structures that may not be feasible for all companies, especially given the diversity in size and scope of listed entities. While the intent behind these rules is to promote greater oversight and accountability, the one-size-fits-all approach is not practical in the current environment.

Companies need to have the flexibility to tailor their governance frameworks to their unique circumstances, particularly during challenging times. Imposing these rigid structures without considering the operational and financial realities faced by companies under stress can lead to unnecessary burdens and operational inefficiencies. These requirements, while useful for larger, more stable firms, should be optional or phased in more gradually, allowing companies the flexibility to implement them when appropriate.

Shareholder director appointments

The new regulations also attempt to impose stricter controls on shareholder director appointments, further limiting the autonomy of companies in deciding who sits on their boards. While shareholder representation is important, the current economic situation calls for a balance between shareholder rights and the operational flexibility of companies. Over-regulation in this area could deter investment and hinder companies’ ability to adapt quickly to changing market conditions.

As it stands, companies should be allowed to retain a level of autonomy in selecting directors who are best suited to navigate the current economic crisis. Given that even countries like India do not impose such strict regulations, it is important to review these provisions to avoid stifling business growth and adaptability.

Conclusion

While the SEC’s new regulations were introduced with the intention of improving corporate governance, some rules are impractical under the current circumstances. Companies need flexibility to manage their affairs effectively, particularly in an uncertain and challenging economic landscape. The loss of directors’ independence after nine years, the rigid committee structures, and the constraints on shareholder director appointments should all be reconsidered. A more flexible approach will allow companies to retain their ability to adapt and thrive during this difficult period, while still maintaining governance standards.

A review of these regulations, with a potential timeline for future implementation, is urgently needed by the new administration and the secretary who was reappointed into the Ministry. This will also facilitate the growth of enterprises.