Agents of change

As custodians of corp governance, institutional nominees and independent directors can be watchdogs

Corporate governance has always been an area of concern in India. However, this attracts (merits) special attention when high-profile promoters themselves blow the whistle in companies whose boards are ornamented by eminent people. The Securities and Exchange Board chairman has also expressed anguish at the state of affairs in a recent interview. In all cases of poor governance, the ultimate loser is the economy and society. It is high time we addressed such challenges and created a more mature corporate governance culture. As custodians of corporate governance the non-executive directors, specifically, the institutional nominees and independent directors can be the change agents as facilitators and watchdogs simultaneously.

Challenges of governance

Several factors collectively impact functioning of boards resulting in unsatisfactory governance. 

The depth of specific business knowledge at the firm-level of most non-executive directors is shallow. Consequently, directors are ill-equipped to make meaningful contributions at board meetings. Besides,  their bandwidth to study the multiple challenges faced by an organisation is limited. 

For want of role clarity, often the role is limited to compliance of regulatory standards and discharging of the basic fiduciary responsibilities. Non-executive directors are rarely involved in detailed strategy discussions and have little influence over shaping the medium to long-term direction of the company, which is critical for discharging the stewardship responsibilities. Also, promoter and executive directors are neither interested nor comfortable providing enough space for external directors to assert themselves. In the absence of any objective analysis of the performance of board members as part of any requirements, it is convenient for non-executive directors to take their roles lightly.
 

Familiarity is another challenge. In any case, a certain level of friendship develops over a period of time, making it all the more difficult for members to take “tough” positions. It is rare that the composition of the board of non-listed companies changes in decades unless members want to move out for major personal reasons.

The multiple challenges of governance will not get addressed unless the role of all non-executive directors is redefined and enhanced. 

Way forward

Improving governance quality depends both on structural and behavioural approaches as discussed below.

Greater involvement: At present, most boards meet once a quarter for a few hours, as per the minimum regulatory compliance requirements. Well-governed boards meet for a full day, with the leader interacting with select members occasionally on specific matters. This is where the problem lies, leading to a vicious cycle of lack of awareness, limited involvement and contribution. Meaningful contribution to vision and strategy, cultivating deeper relationship and stewardship orientation will require board members to be engaged with the company more intensely. For instance, Hilti, the world’s largest machine tools manufacturer, has benefited immensely from its non-executive directors spending about 24 days a year. This means those agreeing to be directors should be willing to devote so many days for the company, not only attending board meetings, but also visiting customers and plants. It is high time Indian companies too recognise the need to deepen their engagement with their directors to devote adequate time; the compliance requirements also may be raised selectively.

Mandatory training programmes:  As custodians of the interests of all stakeholders, directors  should receive structured knowledge on corporate governance; they should necessarily attend certain number of learning opportunities regularly to be effective board members.
 

Formal induction programme: Except for some of the very large and well-governed organisations, members of most company boards are not fully conversant with their roles and responsibilities. The same is true with the promoters. Instituting a formal process of induction will help both the promoters and the directors.

Board performance evaluation:  Introducing a mandatory confidential evaluation of the performance of board members will also lead to improved governance. This should be done with a developmental perspective. 

Nothing works without the heart

These are simple but effective suggestions to implement. To start with, large companies of a certain size should be brought under such a requirement since the stakes of the society are much larger in them. Effective implementation of any governance mechanism depends on the sincerity and seriousness of the promoters. In an economy where public institutions control a significant per cent of equity, it is for them to take the mantle upon themselves and push for changes. As public entities, they have a larger responsibility to society beyond making profits. They should set new benchmarks and appoint directors who believe in their stewardship responsibilities; such members will insist on bringing about changes in the practice of corporate governance and become both facilitators and watchdogs.

Ramachandran is professor and executive director, Thomas Schmidheiny Centre for Family Enterprise, at the Indian School of Business. Ray is professor of strategic management, Indian Institute of Management Calcutta