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If you spend days diving into annual reports while
researching Indian boards and corporate governance standards, here are some
questions you are
bound to ask. IT major Infosys’ nomination committee chose
yet another co-founder as CEO— is it dynastic succession of another kind?
Was renowned Professor Krishna Palepu in the know of the financial
misadventures of Satyam’s Ramalinga Raju? What value do gents like Prof.
Mohammed Salahuddin Ansari, Principal, Madhupur College, Jharkhand and Dr
Deva Nand Balodhia , free lance journalist, ex Officer on Special Duty to CM
Uttarakhand add to the State Bank of India board that they sit on?
What are people like Shahrukh Khan, Yash Chopra, and Javed Akhtar doing on
the board of Jet Airways? How does leading lawyer Suresh Talwar,
manage to find a place on more than 50 boards of listed and unlisted
companies? Why do many large Reliance ADAG companies like Reliance Capital,
Reliance Communication, Reliance Natural Resources , and Adlabs, have just
five (Chairman Anil Ambani plus four non executive directors) people on their
boards while the Andhra Bank board seems to require 19 members?
Hidden in some of these questions are the reasons that have led to corporate
governance being reduced to mere lip service in most Indian companies. But
exceptions remain. In response to the Infosys succession question above,
Co-Chairman NR Narayana Murthy demonstrated why his company is considered the
gold standard in corporate governance: he got Claude Smadja, the then
chairman of the nomination committee to send a detailed answer to explain the
procedure of election of Kris Gopalakrishnan as CEO.
And yes, Mr Palepu wrote back too, defending his actions as an independent
director. His note said: “During my tenure as a director with Satyam, I
fulfilled my responsibilities fully and appropriately. I look forward to
providing my complete co-operation to regulatory agencies as they investigate
this matter. The actions of Mr. Raju and his brother have caused Satyam,
thousands of Satyam employees , customers and investors, and India, enormous
damage,”
While in this sea of stink there are shining examples like Infosys, Wipro,
Mahindra and Mahindra, Godrej, Bharti, ICICI Bank, HDFC Bank that have set
themselves apart, they are few and far between. As one moves down the ET 500
ranking, the standards begin to fall. No doubt, corporate governance
standards are far too complex a matter to be captured in plain numbers, but
numbers do tell a story.
More than 70% of ET 100 boards don’t have women in their boards and of the
2211 BSE listed companies that have filed data with the Exchange only 4.9% of
all directors are women. More than 70% of the ET 100 boards still haven’t
split the Chairman and CEO posts. More than 80% of ET 100 boards still don’t
have lead independent directors in place. The fact remains that hundreds of
listed companies still have to comply with clause 49 norms; in BSE itself
there are 390 companies still to file data.
Governing The Corporate
And now research by an investment bank proves what industry watchers have
suspected all along: large-scale manipulation of accounting standards. A
report by the Noble group says that one in five BSE 500 firms has accounting
issues — companies tamper with revenues, manipulate sales and play around
with cash. So are the members of auditing committees of these companies
sleeping?
No, the independent directors say, they have to rely on the management for
information, and often information and time is short supply in board meetings. “For some
promoters , revenues are a matter of opinion not fact and somehow they always
have to rush to meetings after the board meetings . We have no choice but to
take the management’s word for most issues,” says the CEO of a company who is
on prominent boards.
The fact remains that all three pillars of protection for investors — the
independent directors, the auditors and the regulators are misaligned. “The
institutions of corporate governance are not good enough. We have to reapply
ourselves to restructure the institutions of corporate governance,” says Arun
Maira, Senior Advisor, BCG who is on five boards.
And corporate governance (which in its true form starts after basics like
board composition, size, committees, systems of check and balances, have been
put in place) is often just reduced to meeting the minimum legal requirements
in most cases. “Only the ritualistic portions of corporate governance are
being met with, I haven’t seen a material change in thinking towards
corporate governance,” says N Vaghul, Chairman , ICICI Bank, one of India’s
most respected business leaders.
The promoters’ play
Boards historically have been networks of influence for promoters, so family
and businessmen friends are often nominated, leading to a cosy relationship
in which both objectivity and independence are lost. Indian promoters, unlike
in the West, hold large equity stakes and to quote a well known CEO of a FMCG
company who is on several boards himself, still have an ‘I know what’s best
for my company’ attitude.
Many crafty promoters assemble the boards in such a way that it’s a culture
of ‘collective consent’ and independent directors are mere pawns. “In
promoterled company boards, the level of independence of independent
directors is considerably limited. That’s what the Satyam episode brought
into sharp focus. But in many companies with diversified ownership , the
approach of the board is sharply different and independent directors often
have differing views,” says Vaghul.
However, there are a few promoters like Sunil Mittal who actively scout for
competent independent members and make sure that the board has differing
voices. “I have personally introduced people to promoters who were looking
for board members with right credentials and are the right fit for their
boards. There are enough large Indian groups who are on a lookout for the
right kind of directors,” says Naina Lal Kidwai, Group General Manager and
Country Head, HSBC who also serves on Nestle’s global board.
It’s a well-known fact that Indian businessmen and executives crave for
directorship and promoters know it too well. Promoters know that the
combination of money, perquisites, and bragging rights of being on a
prominent board combined with non-financial leverage of being from the same
social circle often make directors fall in line. And god forbid, if the promoters
find that a particular independent director is erring or asking the right
questions, the person is simply not re-elected .
But then, have you ever heard reports of directors leaving a company in the
media? It often goes unreported, so when three IOC directors quit the board
in quick succession, no one noticed. However in companies like Infosys, the
co-founders go an extra mile to make sure that independent directors are not
influenced by promoters.
In this day and age of globalisation, corporate governance is high on every
board’s agenda or at least the façade is maintained. Promoters have been
quick to crack the corporate governance code because boards with the right
names provide the ‘shine effect’ that helps in many ways, including getting
FII money. So in the last five years, they have been quick to window dress
their boards with academics , consultants, women (for diversity ), and
international personalities but old and faithful favourites like CAs,
bureaucrats , and lawyers still remain permanent fixtures.
Interestingly, Indian boards have their own quirks and preferences too.
Satyam’s earlier board had a clear proclivity for Telugu speaking gents.
Though these preferences don’t affect the independence of the board they
point to interesting possibilities . For example, some big Parsi business conglomerates
still retain a certain percentage of Parsi board members.
To check if the religious undertone play out, we sift through boards of
promoters belonging to a particular community — Wipro, Mirza Tanneries,
Wockhardt, and Cipla — and thankfully there is no religious undertone and
boards are diverse. But yes, many boards show clear regional preferences, especially
Gujarati and some traditional south Indian companies. That’s largely for the
sake of convenience of board meetings , say promoters. Sometimes clannish
behaviour also creeps in. For example, a large North Indian group’s board had
majority of members who belonged to a particular sect in Punjab.
And those who are still wondering about Shahrukh Khan, well, the actor,
playwright Javed Akhtar, and film-maker Yash Chopra were hitched on the Jet
board after the Jet-Sahara deal fell through in 2006 and according to the
2007-08 annual report Shah Rukh Khan didn’t attend any meetings in the
financial year (he was not paid any directors fee or commission but paid
Rs1.64 crore as advance for television ads) and interestingly, the two
members on the audit committee of the airline are Yash Chopra and Javed
Akhtar. As you sift through still more annual reports looking for promoter
quirks, more questions begin to bother you. Why do some large groups still
have promoter’s mothers as Chairmen? Well, we are like that only.
Quiz Reliance ADAG about the size of company boards and the spokesperson’s
response reads like this: The Reliance ADA Group companies have a compact but
optimal composition and size of Boards so as to ensure Directors’ full
commitment and time for focussed participation in the companies’ affairs,
rather than holding routine meetings.
The independent director’s myth
A lot of corporate governance problems stem from the fact that competent and
experienced independent directors who can add value are very few, so there is
clamour for the few good ones. Popular board member choices like Rama
Bijapurkar , Omkar Goswami, N Vaghul, Ashok Ganguly, Keki Dadiseth, Tino
Puri, Aman Mehta, Cyril Shroff and Nimesh Kampani have multiple board
memberships.
Just the five ex-Hindustan Unilever Chairmen, SM Dutta, Ashok Ganguly, Keki
Dadiseth, and Vindi Banga (still in active service in Unilever global) would
be on more than 30 boards of listed and unlisted companies. But the guys who
beat everyone to it are the lawyers from Crawford Bayley, like RA Shah. If
all the directorships of lawyers in the firm are added up it would tot up to
three figures . “We have to expand the existing pool of directors and
companies have to take proactive steps to do that otherwise boards will not
have fresh talent,” says Anjali Bansal, CEO, Spencer Stuart.
But the catch here is that many of the independent directors, unlike in the
West, are not wealthy in their own right, so a substantial amount of their
income is related to board activities. Some popular board members in India
make decent money, like Omkar Goswami of CERG Advisory who sits on multiple
marquee boards; his fees according to 2007-08 annual reports from just three
boards — Infosys , Dr Reddy’s and Crompton Greaves — was Rs 90.73 lakhs, and
he received 3000 stock options from the pharma company too.
The selection of directors in Indian companies remains arbitrary in most
companies and lacks thoroughness; often promoter’s writ runs large. In
contrast it’s a much more thorough process globally. Kidwai says that her
selection and induction into the Nestle global board took nearly a year.
“First, they made background checks, then the nomination committee cleared my
name, and after that I was approached for consent. Five months before I
formally joined the board I was called to meet all the board members. Three
months before joining I had to go for a three-day induction program for new
directors to develop a deeper understanding of the company and its strategy.
Only then I went to the AGM,” she explains.
It would also be unfair to say that some esteemed people don’t refuse
directorships . There are a group of people like Tino Puri, the former chief
of Mckinsey India, who has stepped down from directorships in prestigious
companies like Patni and Godrej because he wanted to cut down on board
assignments due to time constraints. But the independent directors are not a
particularly happy lot and with the Nimesh Kampani-Nagarjuna Finance episode,
along with the Satyam fiasco, looming large, many are questioning their role.
“We just don’t want to be another name, we are being abused,” says Vaghul. “I
am also dissatisfied with the way we are discharging our duties. We are only
going by what is produced before us by the management. In the last few days,
I have been grappling with these issues myself.”
Independent directors complain that it’s the companies’ attitudes that defeat
the very purpose for which they are on boards. While many independent
directors hem and haw, Professor Nirmalya Kumar of London Business School,
calls a spade a spade. “To do a job well one needs information and time. For
information , one has to be able to rely on the auditors and management. For
time, one has to be paid as a good director will need to spend one day a
month on the company . Few Indian companies are willing to compensate for
that,” he says.
THE R FACTOR
The third element of investors’ protection — the regulatory environment, also
has some serious lacunae that some companies take advantage of. Take for
example Section 372A of the Companies Act, which says that while the company
can invest 100% of its free reserves without even a special resolution at a
shareholders meeting, it can’t change the name of the company without one.
After the boom run, many Indian companies , especially in IT, have more money
on their balance sheets than some mutual funds. Then there are other
inscrutable laws that make it easy for promoters to bypass boards.
“Regarding quorum requirements, Section 287 of the Companies Act says that
one-third of the total strength or two directors, whichever is higher, is the
necessary requirement for a board meeting. So the requirement of having an
independent director is not adequately matched by the quorum requirements in
the Companies Act,” says corporate lawyer Rohit Kochhar, Chairman and
Managing Partner , Kochhar and Co.
Similarly, the auditor’s role has come under heavy scrutiny in the Satyam
aftermath , and the auditors PWC acknowledged that Satyam accounts were
unreliable . A closer look at the fees of accounting firms also
shows a disturbing trend. “A majority of listed firms paid the accounting
firms much more for other services than auditing fees,” says Saurabh
Mukherjea of Noble.
So the relationships run deep and with the system of relationship managers
that some accounting firms have started to follow, objectivity and
arms-length relationship may have been a casualty. But the fallout of Satyam
may have one positive — there may be a renewed focus on corporate governance.
Many like Vaghul believe that this might just be the watershed event for that
change to take place.
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