Corporate governance: Looking back @2017

SC's direction has established that independent directors' job has become much more onerous than before

The focus of 2017 was on independent directors (IDs) and independence of the board of directors. The ministry of corporate affairs (MCA) disqualified at least 300,000 directors because their companies failed to file financial statements or annual returns for three years (2013-14 to 2015-16). And, in a case related to insolvency proceedings against Jaypee Infratech (JIL), a subsidiary of Jaiprakash Associates (JAL), the Supreme Court (SC) directed all the directors, including IDs, of JAL not to alienate their personal properties and to be personally present at every hearing. 

Both these have set a new norm of accountability of IDs. It was always known in the eyes of the law that executive directors and IDs are equally accountable but the recent SC direction has raised the debate on whether IDs should be held accountable for all decisions or only strategic ones. 

That apart, the SC direction has established that IDs' job has become more onerous. 

While regulators and the SC have set high performance standards for IDs, two corporate governance episodes — the Ratan Tata-Cyrus Mistry episode of 2016 (spilled over to 2017) and the Narayana Murthy-Infosys board episode last year — demonstrate the institution of IDs is inherently weak. 

Mistry was removed from Tata Sons and other Tata Group companies; Vishal Sikka of Infosys had to resign. The respective promoters did not approve their style of working and initiatives to bring a new management perspective and in changing the organisation culture. In both, the promoters felt the chief executive officer (CEO) could not uphold the values established and cherished by founders. 

In the case of the Tata Group, boards could not demonstrate independence of mind. Those who earlier appreciated the performance of Mistry voted for his removal, presumably only to side with the promoter. The Infosys board supported the CEO and demonstrated its independence. But, it could not hold it. R Seshasayee, then non-executive (independent) chairman, had resigned, allowing reconstitution. Nandan Nilekani, co-founder of Infosys, joined the board as non-executive chairman. Infosys is now out of turbulence. Murthy is comfortable with Nilekani at the helm. 

The protagonists of these two episodes and members of the boards involved are eminent professionals or businesspersons. These episodes show a board cannot act independently of the promoter, irrespective of whether he/she is a member of the board or not, so long as he/she intervenes, directly or indirectly. 

Nusli Wadia, an eminent businessperson, was removed as an ID from the Tata Group of companies because he dissented on the removal of Mistry. This shows promoters and controlling shareholders do not like dissenting IDs and it is not so difficult to remove them. 

Institutional investors' reactions when these two episodes were unfolding show investors do not like any turbulence in a company. They desire peace and smooth functioning. Divided board unsettles company and demoralises employees at all levels.  Therefore, dissenting voices within the board are neither good for the company nor for the dissenting ID.

Both the Tata Group and Infosys are torchbearers of corporate governance. Both Ratan Tata and Narayana Murthy have an enviable reputation for high personal ethical standards. If independence of the board and IDs cannot be protected in the Tata Group and Infosys, it is difficult to imagine companies with concentrated ownership in which the board and IDs can function independently of the controlling shareholder. 

Holding IDs responsible for all board decisions and penalising them for all omissions and commissions of the company will not improve the situation. It will deter individuals, successful in their own domains, to take on responsibility as IDs. Only companies holding high governance standards will be able to attract the right individuals to join as IDs. Others will find it difficult. 

It is incorrect to undermine the advisory role of the board. Outsiders, even if they cannot act independently of the promoter, bring a lot of insights and value by helping the promoter of a family business to come out of emotions, arising from relationships among family members, and disturb the conventional wisdom to survive and grow in rapidly changing business environment.  

The year 2017 ended by making us to think on whether we are throwing the baby out with the bathwater. 

The author is adjunct professor, Institute of Management Technology, Ghaziabad

Mail id: asish.bhattacharyya@gmail.com

Twitter handle: @AsishB50