Large boards affect efficiency in PSUs

Navratna oil giant Oil and Natural Gas Corporation (ONGC) inducted four independent directors to its board last week taking the total number of independent directors on its board to eight. Its 17-member board, however, still needs one more independent director to be compliant with Clause 49 of the Securities and Exchange Board of India (Sebi), which requires half the board to be made up of independent directors.

Public sector majors like ONGC end up having large boards as they need a minimum number of functional directors and Sebi requires one independent director for each functional director. In addition, Sebi does not recognise government nominee directors — which are a must in government-owned companies — as independent directors.

“There is no use burdening PSUs (public sector undertakings) with such large boards… it creates administrative difficulties,” said ONGC Chairman RS Sharma.

There are companies that have boards larger than ONGC’s. Steel Authority of India, for instance, boasts of a 22-member board (including the chairman) — the largest for any company. In addition to administrative and logistical difficulties, such large bodies are too unwieldy for any meaningful discussion.

“Too many people cannot work as a cohesive group,” said Kaushik Dutta, partner at PricewaterhouseCoopers, who has also co-authored a book on corporate governance.

Large boards become unwieldy making it that much more difficult to do business.

“Large companies do not necessarily need large boards. A large board can actually limit directors’ participation in meaningful discussions,” Dutta wrote in the book titled Corporate Governance — Myth to Reality.

While there are no formulas for determining the ideal size of the board, most experts said any number between 8 and 12 is workable.

Sebi, however, is not too concerned about the large size of boards in some companies. “We would be worried if the board was limited to just a few members — two, three or four,” said a senior official of Sebi who did not want to be named.

Some public sector companies have been saying that the government nominees on their boards should be treated as independent directors.

“The objective of independent directors is that promoters are not able to take shareholders for a ride. There should be checks and balances. In the case of PSUs, there are already too many checks and balances,” says Sharma.

Sebi says that it is not reviewing the position of PSUs as of now.

There is, however, another concern that industry experts have about independent directors. How independent are they? Are they competent to add value? “I have been questioning the whole myth of independent directors,” said Prithvi Haldea, chairman and managing director of Prime Database.

Independent directors appointed in concurrence with the chairman, or with the minister in the case of government companies, are not working to protect the interest of minority shareholders, which was the original purpose of the rule.

“Will the independent directors reject an agenda item as it is against the interest of small shareholders?” asked Haldea, who has been pushing for improving the quality of independent directors by recruiting professionals. The key to an effective board then is the right size, and the right quality!