Directors, again

Satyam and Subhiksha cases are similar as their independent directors pass on blame to company mgmt

Both are in serious trouble, but the Satyam and Subhiksha cases appear vastly dissimilar in many respects, except for one stunning similarity. In both companies, the independent directors are passing on all blame to the company management. Fraud in the accounts? How do you expect us to know, we went by what the management and the auditors certified. Provident Fund dues not paid? Don’t blame us, we went by the CFO’s certification; surely you don’t expect the board to go into the details of each payment made by the company! At one level, the directors are right; what can they really do if faced with fraud, or fed with false statements? They have no independent means of verifying whether the management version of things is based in fact. But that raises the question: what purpose does a board serve—especially if, as in the Subhiksha case, the position of the promoter in the company’s management is written into the articles of association, so that the board cannot change the CEO even if it wants to? Asking independent directors to do more also runs contrary to the trend towards absolving non-executive directors of responsibility for various acts of commission and omission—on the logical supposition that if they were in fact made individually liable, then company boards would quickly have no independent directors left as they would all have resigned in haste.

To be sure, boards with luminary directors on them give investors, lenders and other stakeholders a feeling of comfort, that some honest and competent individuals have a watchful eye on the business. But to jump from this to the conclusion that they are ensuring statutory compliance and some minimum standards of corporate governance has proved to be a leap of faith. And so, in many companies, boards have turned out to be more an adornment than anything else. And this is when directors are not compromised by pay-outs of various kinds from the company (in the case of Reliance some years ago, it was disclosed that supposedly independent directors and/or their relatives had business dealings with the company). If the whole edifice of corporate governance norms hangs on the presence of independent directors on company boards (one-third of the members if the CEO is not the chairman, and half if he is), then it is an edifice built on sand.

Is there a way of making boards more effective? Michael C Jensen and Joe Fuller, in the February edition of Indian Management (a Business Standard publication) make some worthwhile suggestions. Boards should have access to information other than what is provided by the chief executive. Boards should have their own budgets, in order to get advice from experts like lawyers, accountants and even consultants. In the absence of this, the questions raised by most boards tend to be perfunctory or, where some members have domain knowledge, the questioning is left to just one or two members. Equally, they say, the board should routinely meet with functional managers, and not just the chief executive. These would provide some safeguards, but in the typical Indian company where the promoter holds the decisive chunk of shares and is also the chief executive, boards by definition will have very little contribution to make.