Are independent directors sleeping at the wheel?

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Neelima Mahajan-Bansal and Malini Goyal

 

At first glance, the board of directors of Satyam Computer Services is a star-cast of eminent people, with renowned educationists, a technology guru, a former bureaucrat et al. So, no one would have expected a dubious, poorly explained and hastily withdrawn decision emanating from it. But it was from this board that the latest crisis for corporate governance in India Inc. came in the form of a $1.6 billion deal to acquire firms owned by the promoter family. Now that the plan has been shelved due to market outcry, the focus has shifted to the company's board which is desperately trying to win back its credibility after four directors resigned.

 

A share buyback or a recast of the board, which Satyam is planning, may end the current turmoil but will still leave the larger question unanswered: Just what did these eminent people who sit on Satyam's board as independent directors do when the promoters were trying to push through the deal? Did they oppose or acquiesce? Did the management mislead them?

 

Satyam's case is neither unique nor the worst case of boardroom indifference in India, say experts who have watched the phenomenon of independent directors over the years. The rigour of corporate governance on Indian boards is much less than in advanced nations, where shareholder activism can force CEOs or chairmen out of the company.

 

But as India seeks a bigger share in global business, there is an urgent need to grow out of instances such as Satyam's Maytas affair. With a few honorable exceptions, Indian companies lack robust boardroom debate and the current controversy should serve as a wake-up call, the experts say.

 

"Historically in India, most board meetings could be held around the dinner table - the board comprised of mostly family members and people who depended on them," says Nirmalya Kumar, professor of marketing at London Business School. With cronies filling up the board, there was hardly any incentive for the entrepreneur to encourage a debate of his decisions. The board merely acted as a rubber stamp.

 

It was for this reason that the Securities and Exchange Board of India (SEBI), the markets regulator, stipulated that at least half the board must have independent directors. These outside directors should be able to provide the counter-balance to the zeal of the promoter family and protect the interests of minority shareholders. But even as companies started recruiting independent board members to comply with the SEBI directive, the culture of docile boards did not go away.

 

Poonam Barua, director of PAMASIA Global Corporate Advisory, has served on several boards as an independent director. She says India has come a long way in embracing compliance and corporate governance, but the change has largely happened in the largest 500 companies. A lot of work needs to be done in the thousands of other listed companies. "I see that corporate India severely undervalues the need for ethics in the boardroom," she says.

 

Even where a sound framework for governance exists, the lack of adequate preparation and information makes the board meetings more of a ritual. Independent directors need a lot of advance information and time to prepare for a debate. But they hardly get them.

 

Barua says many companies don't seem to involve independent directors in setting the agenda for board meetings. The CEO or chairman decides the agenda. Globally, companies go out of their way to accommodate the entire board in agenda setting, often using Webcasts to reach out to people half a world away. But in India, directors may get the agenda handed out to them, that too, just two days before the meeting. The prospects for meaningful contribution, then, are limited.

 

Companies often slip in providing full information to independent directors. Some companies don't take them as seriously as they would consider executive directors or those associated with the promoter family. "If you are not there every day, it's not easy to get information," says Kumar. He says he joins boards of only those companies which treat independent directors at par with the rest of the board. He rejects other offers. "The failing is that we don't see independent director's role in some companies. The board of directors is not seen as serious policy making body."

 

A prominent US-based management professor who sits on many boards in India, says independent directors often bring constraints on themselves by not asking for information. "All these things are the responsibility of independent directors to say, 'I demand it'. Unfortunately most independent directors have not exercised their responsibility," he says.

 

For the system of independent directors to work better, there is also a need to raise average remuneration paid by the companies, say experts. Some top companies pay their directors handsomely, but most others don't. The typical Indian company pays anywhere between Rs. 10,000 and Rs. 20,000 per meeting. "The problem in India is that nobody will devote that kind of time to do the job unless they pay them. Most boards in India, except for a few, do not pay independent directors a substantial amount," says Kumar.

 

For examples of good corporate governance, companies need not go far. There are a handful of examples from within India. Marti Subrahmanyam, Charles E. Merrill Professor of Finance and Economics, Stern School of Business, New York University, cites the case of two Indian companies on whose boards he sits: ICICI Bank and Infosys Technologies. "The standards of corporate governance in these two companies are as good as you can find anywhere in the world," he says. "Both these boards go well beyond their statutory obligations in acting in the interests of their respective shareholders. Board members in these two companies actively help in risk mitigation and strategy formulation. They are also available as sounding boards to management, and provide advice and counsel on a regular basis."

 

There are quite a few occasions where boardroom debate prevented a company from undertaking a risky adventure. Earlier this year, the management of GVK Power & Infrastructure wanted to enter telecom tower business. But it was dissuaded by the board from doing so. Having Pradip Baijal, a former chairman of Telecom Regulatory Authority of India, in the board helped in appreciating the peculiar risks of that business. "The management obviously knows more about the day to day running of the business, but boards can surely provide direction," Sanjay Reddy, vice-chairman of GVK group, says recalling that board meeting.

 

Neelima Mahajan-Bansal is Special Correspondent and Malini Goyal is Associate Editor at the new business magazine to be launched by Network18 in alliance with Forbes. Associate Editor Cuckoo Paul contributed to the story.