Due to the fear of losing potential directorships and other opportunities, most independent directors have so far voluntarily muzzled their own voice. Until now.
JN Gupta & Varun Krishnan
Although it isn’t a straight comparison, Rentala Chandrashekhar, who resigned from the Yes Bank board, can be seen as the Mahatma Gandhi or Nelson Mandela of independent directors in India. Simply because he spoke where many others chose silence.
Chandrashekhar’s resignation had its moment of drama. Yes Bank’s first communique to the stock exchanges said he had resigned citing “personal reasons.” Later, the bank made another announcement leaving out the phrase “personal reasons” as the cause of resignation.
A day later, a media report quoted Chandrashekhar as saying he was “deeply concerned about recent developments at Yes Bank and dismayed at the manner in which they have been dealt with. It is even more distressing that all this should have occurred during a critical transition period when tact, wisdom and purposeful, well-considered actions were called for.”
Such candour is unusual among independent directors in India. The institution itself is not very old to begin it. Retracing its origins will add some context.
The composition of the board of directors (and the laws associated with it) has evolved over time to deal with conflict of interests and abuse of ownership by dominant shareholders, or agency problems associated with unchecked managers. Corporate India had its first brush with independent directors when the Confederation of Indian Industries published “Desirable corporate governance: A code” in the late 90s. This ultimately found its way into the listing agreements of stock exchanges post a report by the Kumar Mangalam Birla committee on corporate governance in 2000. It was followed by the Narayana Murthy Committee and by a voluntary code from the Ministry of Corporate Affairs.
Unfortunately, as a class, we Indians do not believe in good conduct, although the underlying ethos of our society is good conduct. Our good conduct in most cases is an outcome of the force of law, rather than a voluntary act. Independent directors are no exceptions.
Till the adoption of the Companies Act 2013, most companies had independent directors. However, there was no legal definition of the term. In fact, there was no concept of independent director in law till the Companies Act 2013.
The Companies Act tried to ensure that nothing comes in the way of independent directors and their performance. It gave them protection against uncertain tenure with a fixed five-year term, a code of conduct, the definition of independence and stated their duties as well. Did it work? Not really.
The law can instil fear but can’t inject character. Therefore, while many directors met the legal requirement of independence, in numerous cases real independence was lacking. The main reason was a lack of courage in speaking up fearing a fate similar to whistleblowers. Anyone who musters the courage to speak becomes an outcast. Due to the fear of losing potential directorships and other opportunities, most independent directors voluntarily muzzled their own voice. In many cases when the situation became difficult, they chose to resign citing “personal reasons.”
Sample data analysed by Stakeholder Empowerment Services shows that have been 136 resignations of independent directors between 1 January and 30 September this year in the top 500 companies (not exhaustive). In 129 cases, the independent directors have not cited any reason or have provided “personal reason”. Only in 7 cases, have they cited specific reasons. None of the resignations was due to any difference in opinion.
Does this mean that difference in opinion is a must for independence? And all differences must result in resignations? Certainly not. An independent director is expected to bring in an independent, unbiased, and frank opinion on issues faced by the company, proposals being put forward and on issues of strategy, performance evaluation, risk management and the likes.
Differences of opinion are the oxygen of company boards and reflect a healthy atmosphere. This leads to a well-considered, debated the decision-making process in the interest of the company. The moment differences turn into confrontations the atmosphere gets polluted and the concept of board fails. Unfortunately, while the line between dissent and confrontation is quite fine, not many are able to judge and at times cross over.
In the Indian context, Satyam is the best example where independent directors failed. Without going into details, one can safely conclude that in a majority of NPA cases, they failed in their duties. In none of the NPA cases, the public has any information about the resistance of directors. In the post-Satyam era, Kingfisher, United Spirits and Fortis/Religare are test cases of failures of independent directors. Volumes can be written on cases of diversion of funds, related party transactions and failure of governance in these companies.
Independent directors have failed not only in failed companies, but in successful companies as well. In Infosys, Narayana Murthy had cast aspersions, citing a whistleblower letter, on the entire board of acting in collusion. However, immediately after the change of chairman and getting his nominee on board, Murthy has been silent for almost two years, although many board members from the time of Vishal Sikka and R Seshasayee continue as if they have been purified by the presence of Nandan Nilekani on the board. The logic is simple: if they had sided with a person accused of lying and acting against the interest of Infosys, they failed to do their duty then.
However, a word of caution is warranted here: The jury is not yet out on the Infosys accusations. Despite accusations, independent directors who resigned from Infosys didn’t open their mouth and kept silent. Why? Did they buy peace? Or did they think it would be a waste of time? Or was it against board ethics?
Such utter disregard for transparency and failure to follow the spirit of regulations have forced lawmakers to propose a few changes in norms for independent directors. First, independent directors should disclose detailed reasons for premature resignations. Second, independent directors should give a 30-day notice before resigning. Having failed the lawmakers by their behaviour, independent directors can’t now complain of micromanagement.
In the Yes Bank case, apart from Chandrashekhar, two others - Ashok Chawla and Vasan Gujarathi – have also resigned. They have followed the beaten path by citing personal reasons, although media reports highlighted that Gujarathi, who was heading the audit committee, had resigned because of certain observations made by the RBI on issues related to audit and corporate governance in the bank.
It is rare to see an independent director raising a voice against the functioning of the company of where he is a director. However, it is too early to say whether Chandrashekhar’s bold statement is a one-off instance or signals the start a new dharma for independent directors.(Gupta is Co-Founder and Managing Director, and Krishnan a research analyst at Stakeholder Empowerment Services. Views are personal.)