Bored of directors!

Bored of directors!
Bored of directors!

THE TITLE of this piece is a touch dramatic; intended to draw attention to the functioning of a corporate governance imperative — the role of the boards of directors.

True, regulators/authorities set up committees to produce reports such as from Cadbury, Malegam and Kumar Mangalam Birla. Indeed, corporate governance framework formulated by the Institute of Directors, Hawkamah or the Institute of International Finance have codified ‘best practices’ but these are, as yet and at best, evolving work in progress! Few companies can claim to be sustaining  ‘excellence’; even if they flaunt corporate governance ratings from rating agencies.

Ultimately, governance is, as governance does. Issues get flagged to the fore, only  when there are crises; not dissimilar to ‘bad news’ grabbing headlines in 24×7 news channels.  Media goes into ‘over-drive’ in terms of analyses for a few days; if only to move to the next crisis subject! Thus, governance (or lack of it) remains a ‘challenge continuum’. Its deficiencies represent a ‘chronic malady’; not a crisis (or a flash in the pan). Answers and remedies, by definition, require sustained strategy and actions.

Popping of pills alone will not do. Therapeutical processes and curative surgery may well be needed. Early diagnosis is vital as symptoms are apparent only to the practitioners i.e. the management and directors of companies and, in this context, having decorative tokenism (aka ‘independent directors’) will not do. Ongoing governance audit may help enhance the effectiveness of the board functioning.

In factual terms, the so-called ‘independent director’ is a clichéd oxymoron. This is a virtue only to the extent of the concerned director not having affiliation with the promoters or management and in avoidance of conflicts of interests. But such independence per se hardly equips him / her to exercise ‘independent’ and informed judgement on strategic and business issues. Therefore, it is good but not ‘good enough’; as directors ought to have relevant knowledge, experience and character.

Sadly, when they are sourced from friends and acquaintances by existing board members or the management of the company, their ‘independence’ can be compromised subliminally — as such directors may, willy-nilly, follow the diktats and the dictates of those that appoint them or pay their fees. Of course, not all are men of straw or malleable. But if independent directors feel ‘obliged’, they may be constrained to contribute to Board deliberations – without fear or favour. They would not wish to rock the boat! Some academicians and yesteryears’ corporate czars relish board-memberships of successful companies as these are win-win for both and they can cite their ‘prized catches / trophies’ handy; when companies do IPOs and bond issues.

All this, until a Satyam or an Enron erupts, sending independent directors below the radar screen! The pool of eligible candidates shrinks with many not ready to risk their reputation. Only those who chase well-earning pastime/collection of board memberships, care to join. Two further challenges are unique in this region, when regulators insist on majority board members of financial institutions being citizens of the country. This ends up limiting the ‘gene pool’ of experienced and qualified nationals. Worse, some high-profile citizens end up with multiple board memberships and cannot but pay ‘lip service’ to their ‘fiduciary’ duties.

As a result, some directors in the region do not complete their homework diligently and ask inane questions, offer unsolicited and inappropriate advice and opinions. Some in management meekly follow. Others, smugly and cynically, ignore — carrying on doing precisely what they wish to do! Some Directors stay quiet – right through board meetings; coming ‘alive’ only when dividends or pet subjects such as real estate and stock markets are discussed.All of the above may seem broad-brush generalisations but, unfortunately, persist to varying degrees. This stems from poor choice of board members, in the first instance; i.e. not on merits.  Directors should have what it takes to challenge management and share insights; if not vignettes of wisdom.

Board members ought to steer clear of micro-management but be concerned with strategies, policies, ‘succession planning’ and the like — all in the long-term interests of the stakeholders. In some jurisdictions, regulators impose a compliance burden and thus an overload on the Board agenda such as would make even the brightest of board members, miss the ‘wood for the trees’.Compensation of board members should step up to the plate – designed to attract the best talent and experience. Recently, I invited a leading infrastructure specialist to join the board of a financial institution, but he declined. He preferred to be a well-paid consultant to the company rather than a poorly-paid Board member! Besides, he did not wish to run foul of perceived/potential conflicts of interest.

Governments and regulators should, therefore, allow Board members’ remuneration to be approved by the shareholders and monitor to curb excesses; similar to senior executives’ compensation. Shareholders elect and renew each board member’s terms and hence the board members’ compensation can be part of the agenda in the Annual General Meetings — so as to align accountabilities. In India, government nominees on public sector boards of directors are selected somewhat opaquely; chosen to represent various vital interests (agriculture, small scale industries, women etc.) but  such criteria, other than merit and relevance, can detract from creating a robust governance framework. Similarly, Chairmen are also the MD/CEOs of many public sector entities; vitiating a basic principle of separation of management from governance.

Not all board proceedings are recorded electronically for subsequent scrutiny. Sometimes, the Company Secretary is also accommodating enough in preparing the minutes; as per the Chairman or executive management’s wishes and not necessarily to reflect the actual discussions at the meetings.Some boards do not, quite rightly, allow cell phones during proceedings; given market-sensitive disclosures. Lack of focus and attention remains a widespread malaise; what with smart phones, ongoing email/SMSes and small talk in the course of dreary discussions and weary ‘obfuscation’ by the Management on unsuspecting board members.

In the ultimate analyses, governance and discipline, similar to parliamentarians’, would have to be largely self-improvement and self-regulatory by the members themselves; supplemented by peer evaluation and constitutional/regulatory rigour. Or else, we will continue to witness declining political and corporate governance standards; to the detriment of all concerned. – Khaleejnews