The Hindu Business Line : PSU CEOs to evaluate govt directors

MEDIA reports talk of a proposal by the Bureau for Reconstruction of Public Sector Enterprises (BRPSE) to let the chief executive officer (CEO) of a public sector undertaking (PSU) evaluate the performance of government directors. The objective of this move is to make the government directors more accountable for their performance. The new system claims to remove the impression that their contribution is negative.

The move raises basic questions on a host of corporate governance issues. .

Upsetting the hierarchy

The PSU manager — the government — looks to the CEO to deliver results. Obviously, his hands need to be strengthened. To aid the CEO, the government appoints a board that comprises experts, management consultants, chartered accountants, eminent lawyers and senior civil servants.

Such a broad-based, autonomous and professional board helps the CEO make decisions on strategic matters. The new system of the CEO sitting in judgment on government directors could create friction in the board.

Recent trends

In the West, in recent years, the relations between the CEO and the board have been much debated upon. There are several reports that could serve as guides.

Sir Derek Higg (the UK) recommended that the chairman of the board and the CEO should be separate personalities. The intention being not to concentrate too much power in one person. New Delhi's latest proposal goes against this idea.

Not a wise move

Is it appropriate to make the CEO sit in judgment of the government directors?

In the West, mechanisms are being tried out to ensure that there be a periodical peer examination of directors and their contribution to effective and useful board deliberations and to the profitability and growth of the company.

There is also a move in the West to allow the board of directors meet the top managers of the company without the presence of the CEO. This is to help the directors get a feel of the company's real working and also get information about the operations that do not normally come to the board's notice.

This proposal, however, has not been well received by company chairmen and CEOs as they fear that it would dilute their authority.

In India, the current practice is for the government directors to report to the Ministry concerned on the deliberations of the board and the decisions taken.

This keeps the government apprised of the operations of the company and the problems it may face. This system needs to be improved and used fruitfully.

Pitfalls of the new proposal

The CEO is part of the board, but in the company's organisational chart he is subordinate to the board. The move to empower the CEO to evaluate the performance of the government directors will develop in them a tendency not to rock the boat. Free and frank deliberations among the board members could become a casualty.

Second, the move will make the CEO all powerful and someone who will dominate not only the regulator, the industry, but also the financial analysts and the institutional investors.

Corporate management literature in the West has been debating the emergence of the all-powerful corporate Czars. In fact, in every corporate scandal that has dogged the Western world in recent times, the relationship between the CEO and the board was closely examined.

Expert observations

The UK's revised corporate code provides that the board should make a formal annual evaluation of the performance of the committees and the directors. This would automatically involve the evaluation of the CEO too. A Korn-Ferry survey in 2001 found that 42 per cent of the board of directors regularly assessed their performance and 67 per cent evaluated the CEO's performance.

Obviously, there was no system, and rightly so, of the CEO evaluating the performance of the board members. The move to ask the PSU CEO to report on the efficacy of government directors will only silence them and create in them a tendency to toe the line of the CEO.

A leader in The Economist on corporate governance said: "Let the non-executives, once a year, meet to evaluate the chairman's effectiveness. Too many checks and balances can lead to imbalance and checkmate."

What we need are knowledgeable men and women of integrity to guide the PSU and its CEO and inform the government in the event of deviations. Nominee directors are the best persons to undertake this task.

More urgent issues facing PSUs

Suggestions such as these will not in themselves contribute to the profitability of the PSUs. Each PSU faces problems of the market and competition unique to it. These are major issues in themselves and addressing them effectively should be the top priority. These issues are not going to be made easier by the present proposal.

In final assessment, it is the board of directors that needs to sit in judgment over the CEO. What is more important is how successfully the CEO runs the company and raises profits consistent with the obligations of the PSU. Moves such this are only diversionary in nature. It is hoped that this proposal is not pursued.

(The author is a former Executive Director of LIC.)

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