Kumar Mangalam Birla To M Damodaran: Chairman And MD Roles Should Be Separate

Kumar Mangalam Birla: We have for the longest time, had the role of MD and Chairman- two separate roles so I cannot imagine how it would be like to have both of those roles combined into one. The difference in roles is very stark, the chairman obviously is looking at the broader context, the GDP issues, strategic directions. He is also looking at heat-risk maps to see how the company could get impacted by the external environment and what is happening in the world around. The MD primarily, his/her role is to focus on a day-to-day, month-to-month or yearly focus and escalate issues that are agreed upon in advance to the chairman. Having a chairman also means that you have access to someone who is above the management, in case you have an issue that requires resolution on his or her level. So, for me, this whole concept is something which is a given. I don’t know how we would function with the MDs and the company’s role put together, amalgamated. I think it would be quite ironic to have both functions carried out by the same person.

As you would know in our context, we are very fortunate not to have brothers.

Having said that, I’d dread to be in a situation like that. That would be an extremely complex situation to deal with, I would imagine. I am sure there are many family-run companies in India which have a situation like that, and I guess the dynamics would be different. I see that the concept of family counsels has increased in India where you have independent people advising families as to how to sort out any potential or existing conflict. As far as we are concerned, since I am the only one from the family who actually runs a business, every company would have an MD and a chairman who are not related. In fact, as a philosophy, if two people are related, they can’t work in the same function for sure any company. They cannot be in the same line of authority and likely not to be in the same, say finance function, unless they are separated in terms of part of the function.

Not at all. I think the things you are talking about are all functional knowledge.

Sometimes, innovation is not required. At times you stick to the trusty, old concepts that have come down over time. I think its more about a person’s track record, his experience, whether his experience is relevant to a part of the company’s operations. If not, generally overall to the space that the company operates in terms of strategy. If one of our company’s product mix is changing and the auto players are going to become more and more important as a customer segment, we are looking for a director who has experience in the auto segment because that’s a segment that’s new to us. Some of our directors have held the position of CEOs and have had an outstanding record of running companies. Some are specialists, in some cases depending on the requirement of the company in terms of input. I don’t think a test for integrity exists. Any other test is a functional test I don’t either you or I or more senior people in this room would remember everything about security law and I don’t think that is required either for someone who is on the board. I think its more about track record and the experience. In fact, its relevance to the company that you’re appointing he/she on the board.

I would like to think that there is a mixed-bag. I mean, there are some who don’t really bring much to the table. There are many others who not only bring their experience to the table, but they will go out of their way to research or talk to people on topics that the board has issues with. Many of them play a very effective role of being a conscience keeper to the company. I think that in itself is a very important contribution that many of them make. I think their role in committees is normally very useful; whether it is the audit committee or the finance committee or the nomination or the numeration company, I see that we get some very valuable insights from several of them on these committees. These committees are empowered. A lot of the things that independent directors talk about, suggest and actually get implemented in a very institutionalised kind of a way. I think the idea of not having independent directors is now a very alien idea in India. There was a time where you did not require independent directors up until the mid-80s I would think. Then there are sort of layers to it in several of my contemporaries. Global companies also have on their board the concept of a lead independent director and his/her role is in a sense given more sense onerous him/her or on the company. So, I think while we are a little away from getting into that kind of nuanced segregation of roles, the question of having independent directors is under debate anymore.

Again, it’s a mixed bag. I mean, you need to have in my view, very clearly articulated guidelines as to, can there can be anonymous complaints, do complaints have to be accompanied by the name of the complainant, can it be a complainant where it is about just salary or wages or increments? So, and so is about misconduct or not complying with companies’ values. I think one has to use one’s judgement; whoever is the compliance officer has to seep through that and you can’t run after every complaint because that would become a wild goose chase but I think you need someone who has the judgment and who also has the advantage of and the wisdom of others in the company to pick up the right ones and to bring it to the notice of the right people in the company. So, I say, you can’t ignore them, but you got to be careful not to start chasing ghosts because that could be quite the counter productivity.

So, in my experience, and in our companies, four or five years ago, everyone was graded an A or an A+ and now, I see some distinction happening- in the sense that you would have bought members who would, say, all independents average, all executives outstanding, and another category could do much better. So there is some distinction which is starting to happen and I think that hesitance to actually call out performance is diminishing but taking a very long time. I have always had ten on ten, as you can imagine, as a chairman of all my companies which is somewhat disappointing because that doesn’t mean anything to me at all. I’d love to get some feedback either formally or informally. So I think it’s seen as of today as a statutory exercise that every company has to go through.

I don’t see that happening for a very long time.

I think that’s a cultural issue and the fact that the mandate of this audit is to give people feedback on how they are doing in terms of their role as a board member. So, that they can get objective feedback and they can contribute more on their specific areas in which they can contribute. Either the chairman or MD needs to set the agenda let’s say, for board meetings more clearly, take charge of discussions, make sure that you are getting the right inputs and the right areas of focus from the committees. So, I think that’s more that kind of a role where the objective is to improve the productivity of the discussion of the members and get more participation from all the members on the board. I don’t think that its meant to be used as a mechanism where you actually ask the director of the board to actually leave the company.

We do have meetings twice a year only of independent directors who meet by themselves and come back and give feedback to management. That’s more about what’s the strategy of the company and vision of where we are going, what we need to do more of, what we need to avoid, that sort of things. I think that is also recent in the last two or three years. That I found is very recent in the last two or three years and it is a value-adding exercise. They have sometimes the context of management or asset promoters being so close to the company and its operation that they might have just hit a blind spot. I think that’s a very valuable contribution that independent directors can make.

We are at stage where when there is a need for a change, whether someone has been asked to leave on account of performance or there is retirement happening, at that point of time, we would bring several profiles to the NRC to start with who would then recommend to the board and we will have a very extensive discussion around at least two or three different profiles so hopefully, one from outside, two from inside is a kind of metric that we kind of want to follow. I don’t think that we have a system of discussing succession planning for the next five years and I doubt that most Indian companies do well. I think that a lot of us don’t do it even internally leave it alone taking it to the board.

In particular, on succession planning?

To be discussed at the board? I don’t think you can ensure a quality standard of discussion you could mandate that succession planning is discussed at the board once a year for example and once in two years which means it will find a place for the meeting but the quality of discussion can’t be mandated and that depends very much on the chairman, CEO on how well planned they are and also, how much they value the opinions of the board members especially the independent board members.

Some of the board companies that we have, have a risk management committee, not all do. But I think that it’s something that management has to track and has to track in a very systematic way. We have something that we call the risk heat map where we segregate risks into four different quadrants depending on the possibility of those actualising and the impact of those which is discussed at a management level every quarter. But I think it’s important as part of the induction of a director to apprise him or her of the different risks that a company is exposed to, whether it’s technology risk whatever the risk might be from a competitive landscape point of view. It’s important that the management, the CEO keep the board apprised of developments on that front. We would see a heat risk map at least twice a year in the board where the CRO- the chief risk officer if not the CEO, would talk about any movements within the risk map. So for example, we in Novelis which is an aluminium rolling company, we figured out from seeing the heat risk map that there is a new technology that steel is developing—the lightweight steel. The main advantage of aluminium versus steel is that it’s much lighter and we figured from there that that wasn’t something that had been highlighted by the management to the board. We picked that up as being a very important criteria for competition in the future which in turn gave way to series of developments. We’re now taking that as a very important exercise project in our development centre and I think about a couple of hundred million dollars have been spent because that is protecting your competitive advantage as aluminium vis-à-vis steel. So I think how you interpret a risk heat map becomes a very important element and also it can be a tool that can be very useful in terms of providing information that sometimes would have not just made it to the radar.

I actually think it’s worked out quite well. So, you always have in the case of a new concept like CSR, there will be some amount of abuse which I’m sure exists but I find that a lot of companies, whatever is the amount that it works out to, actually are looking out to contribute even if in a small way very often to a cause that is dear to the employees of the company or to an initiative where some of the employees would like to spend their own time and their own money also. I actually think it’s been a very good addition in the mandate that has been set out for companies. So, if you think about it in the Anglo-Western world we don’t have enough research in India but if you look at research in the Anglo-Western world, I think the after the church, the biggest constituent of society is actually the corporations and therefore the expectations from corporations to give back, to help build a richer planet—for example, to remove some of the inequalities that exist especially in the case of a very stratified society—is actually going up and up and the expectations from corporations as you would know are becoming more and more complex. So, I think giving back and very frankly giving back is not just an altruistically good thing. I also find that I’ve actually seen this myself and have also read research as you would have to say that companies that do good are good corporate citizens actually get valued higher as well. So, from a very clinical point of view it makes sense just on the numbers part of it as well.

Here, I think it’s been mandated so we don’t have a choice. What we need to do, what we have done is study more and more of technologies available. We’re spending much more in terms of capex on CO2 emissions and other sustainability issues than we ever have in the past. In fact, I saw this year that we’ve actually cut back on some capex and allocated those funds to investing on sustainability initiatives. My only issue or my only contention is that, you have some areas which are mandated to have norms which don’t exist anywhere in the world. So, I think we need to strike a balance. You can’t tell me that your emission norm has to be ‘X’ when no one else in the world is able to meet that norm and worse still there doesn’t exist a technology by which you can achieve ‘X’. I mean, you can only achieve up to ‘X‘ plus 20 percent. So, I think while it’s a good initiative, whilst it has got us thinking, whilst it has got us spending in the right direction as any corporative of repute would do; I think that the mandate that is given in terms of the levels that are set need to become more realistic and also graded over a period of time. The expectations that you can adopt all of this in the course of one year or two years as compared to the several years that your Western counterparts have taken is I think, unrealistic and that’s what needs to be looked into.

I’m sure everyone who’s been at an AGM know that not much that happens. There is poetry, there are flowers, sometimes abuse as well. Comments on quality of the pictures and the annual report. There is no qualitative discussion that happens. Investor education it has to be a continuous exercise. So, in our case we would have a small team of two people maybe in each company who only do investor relations the whole year round. So, investor relations are obviously a very important function that the corporate function division or normally a separate IR division needs to perform. I think it’s becoming almost a run-of-the-mill that you need to have a certain number of non-deal road shows or whatever you might call them. We would actually compile which investors were met, by who, and the cause of the kind of discussions that were had, the concerns investors had and the manner in which they were addressed. So, I think that’s become a very important role of management. Again, we are spending much more time on that than we’ve ever done in the past.

Kumar Mangalam Birla: I agree. I think that, in many aspects, the role of independent directors is becoming way too onerous for someone at the end of end of the day isn’t spending all of his or her time looking at the running of the company. But I think again, it’s up to the company to give them comfort from the kind of disclosures that they make and the kind of comfort that they can give to independents about the governance standards that exist in the company. I think from what I understand is a balance that needs to be struck even in companies in the U.S., and in Europe that’s a constant struggle. I think that more and more independent directors have to carry a more onerous role vis-à-vis minority shareholders for sure. M Damodaran: The good news is that a large number of offences under Company Law are going to be decriminalised. So, therefore you could get hit hard but you may not become a straight guest.

M Damodaran: You said the last three years. If you would have said last 20 years, I would have winced but anyway, I didn’t get a question.

M Damodaran: No, maybe I’ll take that question because whatever Mr. Birla may have done in his life he’s not been a regulator. No, I think the answer is very simple. The laws are written for bad people not for good people. You can’t have different sets of laws. So, as long as there are bad people, good people will pay the price. It’s as simple as that because you got to write laws for bad people.

Kumar Mangalam Birla: I think the bigger issue also or another issue also is that of the multiplicity of regulators in a sector and having to provide the same information to different people or different people are asking the same thing from different perspectives or you can get caught out by one regulator not another. So it’s a bit of being cat on a hot tin roof which I think is not a very desirable thing.