Board Failures: Five Questions To Ask On Why Boards Are Ineffective
This is the second in a series of columns examining board governance in India.
With the heightened media focus on ‘governance issues’ and the re-enactment of several legislations in the recent past, we see that the discussion in boardrooms, and the common understanding of the roles and responsibilities of directors, is undergoing a major overhaul. While efforts towards legal compliance continue to be a top priority, we believe that embedding good governance practices into the fabric of corporate culture in India will entail addressing some tough questions.
1. Why Are Boards Still Ineffective In Dealing With A Governance Crisis?
It is universally accepted that the role of the board is to steer a company towards growth and away from crisis. There, however, appears to be a predictable and all-too-frequent collapse of boards in critical situations. It is arguable that the boards could have taken more mature decisions in a timely manner to mitigate or avert the damage altogether, had they been better prepared.
This raises the question of whether our boards are adequately trained to handle a crisis.
Have they developed a response plan in ‘peace-time’ to ensure a timely rollout in crisis? Have they stress-tested their response plan in different kinds of crisis situations? It is like the proverbial adage of digging a well once the fire starts. Most importantly, is the conversation in board rooms steering the approach towards crisis management from a curative to a preventive one, or, are boards lost in the tyranny of the standard agenda of goal setting and approving financial numbers every quarter?
2. As Institutional Ownership Rises, Are Boards Actively Increasing Governance Sophistication?
Public companies are increasingly witnessing a higher portion of their equity being held by the category known as ‘institutional investors’. This coincides with the relative decline of controlling promoters. In many ways, this trend is hailed as a welcome one, from a governance standpoint with the focus on professionalisation of management, absence of conflict, increased diversity in the boards, and better disclosure practices. The experience of the West, however, poses some predictable challenges that arise from dispersed shareholding patterns, including the ‘agency problem’ with the interests of stakeholders and managers being at divergence, the increased pressures of short term-ism in decision making, and the unpredictability of the changing nature of shareholder priorities on strategic issues.
With this rise of institutional investors, I ask – are companies building up their sophistication to respond to activist investors and tackle the pressure to take decisions in the interest of certain institutional investors that may not align with its own?
In the absence of a powerful voice on the board, who will ask tough questions? Or instead, will we have a conspiracy and silence of players without skin in the game?
3. Is It Time To Deal With Board Dysfunctionality Arising From Narrative That Demonises Promoters?
In many strains, we see the discourse on governance challenges in India, being attributed to the deeds and misdeeds of ‘promoters’. There is a presumptive bias of dishonesty or conflict. Several amendments have been introduced to the Companies Act, 2013, and SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, with a view to restrict and check the powers, and the seen and unseen influence, of the promoter.
I now ask whether the overly negative discourse on promoter-led organisations, has made us overlook many positive facets of the dedicated leadership that promoters offer to the company that they founded.
Is the creation of ‘sides’ on the boards, and the subsequent ‘us versus them’ syndrome constructive?
Is there a need to recognise and value the deep commitment of promoters to a company, similar to the value that is attributed to the role of independent directors, in order to effect a re-balance that results in more functional and constructive boards?
There seems to be a risk reward imbalance and that cannot augur well for a stable governance framework. Especially in a corporate and social culture which is and will always have many promoters, as it lies at the heart of India’s definition of entrepreneurship.
4. Is Over-Regulation Disincentivising Board Effectiveness?
Admittedly, India is a jurisdiction where regulators, and not the markets, are seen to be driving governance conversations and benchmarks.
Compliance then, has become the primary metric for the board, rather than actual effectiveness of the boards in driving forward a good governance agenda.
In this context, I ask whether, arguably, over regulation provides a safe blanket to the boards to work within a ‘letter of the law’ framework and does not incentivise assessment or enhancement of actual effectiveness.
Also, does such prescriptive regulation make the boards adopt a ‘survival’ attitude, lost in the eternal ‘gatekeeper’s anxiety’? Is the challenge enhanced by the reality that much of the law is ambiguous and ‘grey’ and in today’s environment – grey could more often mean ‘black’?
The erosion of the benefit of doubt is adding to an over-technical, risk-averse outlook.
Is this what we intended?
5. Are We Addressing Structural Gaps That Deter High-Quality Professionals From Directorships?
Unlike the settled position of limited liability of owner-shareholders, the liability of directors appears to be at an evolving state of jurisprudence, trending away from reasonableness or limits.
The cautious tone that has been set by the courts in the recent cases, where the corporate veil is readily lifted, personal assets of independent directors have been frozen, and corporate boundaries getting ignored, raises the obvious question on whether we have adequately weighed the cost of the unintended consequences of over-zealous and unpredictable regulation and enforcement.
The duality of remuneration that is capped and liability that has no limits, begs the question of whether there is adequate regulatory and judicial will to address the structural gaps that inhibit high quality professionals from accepting directorships.
Where corporations are increasingly forming the driving force of the economy and social structures, it is pertinent to question whether the system will survive the lack of quality professionals at its helm having fallen at the altar of judicial and regulatory zeal.
Let us know which question is on the top of mind for you in the comments section.
Cyril Shroff is the Managing Partner at Cyril Amarchand Mangaldas.
The views expressed here are those of the author and do not necessarily represent the views of Bloomberg Quint or its editorial team.