By Mandar Kagade, Analyst, Bharti Institute of Public Policy, ISB
Public policy making in India in recent times epitomizes the famous opening lines by Charles Dickens. Forces shaping policy are much more inclusive, thanks to a politically conscious youth and an accessible social media with a capacity to amplify the message several folds in a very short span of time. The flip side of inclusivity is chaos; catalyzed by the aforementioned factors, policy making has also become a lot noisier and as such it runs the risk of being high jacked by populist causes.
Public policy in Indian business context faces its litmus test in properly harnessing the inclusive forces shaping it without letting populist regulation lead it astray. Thus far however, India has had little success in achieving this harmony; take for instance the recently enacted Companies Act; it bans independent directors from being compensated in stock options. It also makes mandatory for certain companies to retain a woman on their boards. A still further measure mandates disclosure of wage gap between the board of directors and the median employee of the company. While certainly not lacking in good intent, these mandates add to the cost of compliance by the company without necessarily adding value to business. Outside independent directors are otherwise disinterested and least informed about the affairs of the company. Stock options align the incentives of outside directors to those of shareholders and can significantly motivate them to take active interest in supervising the company. Moreover, for that very reason, they are attractive to potential candidates in the independent directors’ market where companies are facing a dearth of quality supply. But perhaps animated by the media outrage surrounding excessive compensation and stock options during the financial crisis, the policy underlying the Companies Act prevents companies from utilizing this efficient aligning device.
As a direct cost bearer of bad public policy in corporate and financial regulation, corporate and financial sector thus has a critical stake in ensuring that public policy creates laws that promote efficiency. Given the new found competition in the marketplace of ideas (that the first paragraph underlined), “pitching” policymakers with reform proposals aimed at promoting efficiency won’t be easy; but the task is cut out for India Inc. regardless.
A critical element in this endeavor would be training human capital that thinks like entrepreneurs but operate in public policy vertical to engage and liaise with the policymakers and the government. It is therefore most appropriate that such human capital be enlightened about public policy and policymaking at an internationally acclaimed B-school like ISB. The monthly newsletter to be published by the Public Policy Club is best seen as a small extension of the aforementioned effort. As India Inc. leverages a stable and relatively pro-business political climate, the newsletter of the Public Policy Club has not arrived a moment too soon.
 See David Yermack, Remuneration, Retention and Reputation Incentives for Outside Directors, p. 12, 36 (2003) (finding statistically significant association between the pay-performance sensitivity and growth opportunities of the firm measured in terms of Tobin’ Q and R & D/ assets) available at, http://papers.ssrn.com/sol3/papers.cfm?abstract_id=329544&download=yes. See Michael Jensen & Kevin Murphy, Performance Pay and Top Management Incentives 98 (2) Journal of Political Economy p. 227 (defining pay-performance sensitivity as a dollar change in CEO wealth per dollar change in shareholder wealth)
This article was first published in Newsbytes, ISB’s Public Policy Club Newsletter in the October 2014 edition.
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“The views expressed in this article are personal. Mandar Kagade is Policy Analyst at the Indian School of Business.”