Board Failures: Saving Promoters From Themselves
From maximising value while balancing two sets of shareholders, independent directors’ role is now to balance multiple agendas.
Being an independent director on a board is a challenge. Doubly so in India.
From names on the masthead aimed at attracting capital, to counselors to families and managements, the role of independent directors has changed, as the law has steadily burdened them with more responsibilities. Just as independent directors narrowed down their role to being arbitrators between the controlling shareholder and public shareholders, legislation has now tasked them with providing oversight and exercising control. For example, the audit committee needs to approve related party transactions.
I expect the role to continue to evolve, as the duty of the director itself has changed. For the longest time, this was to promote the interest of the company, and by extension, its shareholders. Directors are now expected to promote the interest of all stakeholders – employees, suppliers, the community and the environment.
From maximising value while balancing between two sets of shareholders, their role is now to balance multiple agendas.
Even as the law has changed, market expectations have soared. For the longest, it was the controlling shareholder who took the blow for governance failures. Now each misstep by a company is seen as a failure of its board and independent directors. Investors are quick to judge directors for their inability to rein-in strong CEOs, for their failure to push back on high salaries, for their inability to hold-off on related party transactions. Independent directors face these and similar dilemmas in each board meeting. Described as the hand that feeds syndrome, it is not always easy to go against the person who invited them to join the board. But they must.
Last November, the Supreme Court restrained not only the promoters of Jaiprakash Associates, but also the independent directors and their family members from transferring any personal assets or property without the court’s permission. Earlier this year, three independent directors on Nirav Modi’s firm—Sanjay Rishi, president of American Express for South Asia, Gautham Mukkavilli, a former PepsiCo India president, and Suresh Senapaty, a former chief financial officer of Wipro—were restrained from freely accessing their bank accounts as part of an ongoing investigation by the ministry of corporate affairs.
The real danger is that the lower and district courts now cite these as precedents to penalise independent directors.
Only a thorough check of the promoters and the business before joining the board, can mitigate this risk – but not wholly.
Resignations, And Explanations
How have independent directors dealt with being on boards and these changes? Drawing on Alberto Hirschman’s framework, they have always had three choices - exit, voice or loyalty. Till recently most chose to stay loyal. With the passage of the new Companies Act, we have seen a spate of exits from boards.
Resignations, from a public shareholders’ perspective – especially from boards of beleaguered companies, is a sub-optimal outcome.
We have lately seen R Chandrashekar resign from Yes Bank, and Vikram Mehta from the board of Jet Airways. Investors would rather they stay back and help companies navigate through troubled times. Board members need to factor this into their decisions, but for them to do so, regulations need to draw a line between culpability of owner-managers and others on the board.
Regulations may now have pushed voices to the forefront: directors are articulating why they have left the board. We have seen two such instances in quick succession – Yes Bank and JM Financial ARC. Whether these are an aberration, or the beginning of a new trend, we will know soon.
Be More Prudent Than The Owner Is?
It is said that the best way to contribute on a board is to imagine you are the owner; but how does a director argue with someone who has skin in the game, when they themselves have no stake in the business? But clearly, directors giving their unqualified support to owner-managers has not been working. Look around and you will see that the corporate landscape is littered with failed companies and many more with anaemic performance.
- Expansions funded by debt, since promoters want to maintain their control.
- Acquisitions stapled through double leverage because promoters don’t have equity funds to bring in.
- A high salary for the family members, because they believe this is where the value is, and not in the market capitalisation.
- Moving funds between group entities till the money is tunnelled-out.
- Auditors singing to the promoters’ tune till the absence of liquidity bares all.
How can independent directors keep track of all these? Lawyers can no doubt draw-out a checklist to help directors steer through all this and more.
This gives directors a pointer. Directors should task themselves with protecting the promoters from themselves, and in professionally managed companies, managements from themselves. This alone will help directors earn the trust of the company, its stakeholders, the regulators and investors, and to play the part that they are elected to play.
Amit Tandon is the founder and Managing Director at IiAS - Institutional Investor Advisory Services. The author thanks Info Edge founder Sanjeev Bikhchandani for the headline.
The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.