Let’s reboot on corporate governance

The Uday Kotak committee recently submitted a proposal to SEBI for improved corporate governance norms involving higher empowerment of independent directors. We have to wait and see which of the comments by the public are accepted, which of these are made rules and which are suggested as principles. The Kumar Mangalam Birla committee had, in 1999, elaborately set out guidelines for corporate governance with mandatory and non-mandatory recommendations, including responsibilities for well-qualified independent directors for effective oversight of management as also an appropriate trade-off between maximisation of shareholder value and stakeholders’ interests.

However, some incidents of shareholder activism and management overreach in the corporate world in the last seven or eight years have possibly prompted SEBI to constitute the Kotak panel to review the current position and suggest more effective governance norms. Still, no matter what the norms, the broad Indian corporate ownership pattern will continue to severely test these.

The situation in India is, however, quite different from the experience of corporates in the western world, particularly, the US. Activist investors such as Bill Ackman, Carl Icahn, Dan Loeb and Paul Singer have used their multibillion-dollar hedge funds to gain significant stakes in large MNCs. Over an average period of 12-18 months, their representatives have run aggressive campaigns and forced the respective boards to change the business direction, jettison acquisitions and/or even change CEOs. The recent change of the CEO at AIG at the behest of Icahn and the strong ongoing attempt for CEO change at Akzo Nobel by Elliott (Paul Singer) are examples.

In India, at least three major incidents of shareholder activism have grabbed headlines. First, we had the case of Satyam Computers in 2009 where a supine board agreed to the proposals to buy the promoters’ ventures, namely, Maytas Properties and Maytas Infra for $1.6 billion. The deal was aborted following a shareholders’ revolt which went on to reveal one of the biggest creative accounting scandals in India.

Secondly, the ouster of Cyrus Mistry as chairman of Tata Group companies in February 2017 brought out a recurring theme prevalent in many other Indian corporates where relationships between the original promoters and the companies are governed by undue reverence to company founders and deference to tradition, thereby exposing other stakeholders, including minority shareholders, to unquantifiable risks.

Lastly, we have the case of Infosys, which for long wore an aura of governance professionalism. The founder shareholder, much to the chagrin of the board, succeeded in driving out the CEO through a campaign which fell short of proving that the latter had profited from an overseas acquisition.

Whatever the CEO’s faults, he had a clear vision of moving Infosys away from being a body shop for the western IT world into becoming a provider of innovative services given, in his words, “the tidal wave of automation” threatening to engulf the industry. This rankled the old order in the executive which had served under the founder and subsequently left during this CEO’s stewardship. The old order has since been appeased with the return of trusted warhorse Nandan Nilekani but the buzz created by NR Narayana Murthy refuses to die down.

These days, in many companies across all sectors, boards are undergoing a profound transformation largely prompted by shareholder intolerance with uninspiring corporate performance. As a result, boards are becoming more demanding and intrusive in their interaction with management. And this has little to do with the KM Birla committee recommendations. The role of the CEO is, therefore, becoming more daunting and, at times, understandably frustrating. Consequently, a successful CEO is one who works with the board members and selectively seeks their help through a less formal but more intensive style of communication. Also, while ensuring that all strategic planning remains firmly in the hands of the executive, this CEO may invite the board for its advice and feedback right from the beginning and, later on, provide periodic updates.

Importantly, the boards would do well to ensure that they limit themselves to identifying the problems and not assume a problem-solving mode, which should strictly lie in the executive domain.

As strategic risk increases in today’s fast changing business environment, so do the chances of failure on account of ungoverned incompetence. As they say, profits are to good governance what tides are to swimming trunks; when the former is high, absence of the latter tends to go unnoticed in both instances. The boards should keep a keen eye out for three possible types of crises.

The first could be a collapse of competence when the executives are unprepared and take on programmes beyond their competence. Secondly, the management could neglect to seek expert help when required, throwing up serious shortcomings in self-governance. Thirdly, the failure of the CEO to pass on essential information to the board could reflect poor governance architecture in the company with fatal consequences.

Arising out of the Tata and Infosys crises, the need for an explicit negotiated agreement between the boards and the executive cannot be over-stressed.

As a result, there would be no cutting across each other’s domains. The design of the processes for achieving this should be well embedded. It is the responsibility of the boards to beware of biases and blindspots creeping into their functioning on account of the organisational culture; they should constantly question the norms and assumptions which define the prevalent culture and prepare the management to introduce necessary changes for the company’s long-term health and survival. A system of all-pervading internal learning and reflection in all segments of the company would help it renew itself for emerging challenges in business.

In all this, we cannot forget the famous case where the board of Yahoo! was so spooked on being labelled as the worst board in the US in September 2011 that they went ahead and, within days, fired the CEO, Carol Bartz, over a phone call to disprove their lame-duck status. There is also, therefore, every need to ensure that boards do not don the roles of activist investors who get prompted at times to take knee-jerk decisions to display their power. It is in nobody’s interest to kill the goose that lays the golden egg.

The writer retired as deputy MD, SBI