The Hindu Business Line : Role of public representative director in corporate governance

Corporate governance in India was introduced by the Securities and Exchange Board of India (SEBI) with the noble intention of improving ethical standards in the corporate world.

The appointment of public representative director, audit and remuneration committees are the most important components of corporate governance. This article looks at the status of the public representative director and other issues relating to corpora te governance. The post of the public representative director has so far been a sinecure. But, this has changed following the recommendations of the Cadbury report.

Senior independent public representative directors now have to be identified to deal with issues which are required to be conveyed to the board rather than the CEO. The public representative directors on the board are expected to share the management’s outlook.

Two aspects

There are two aspects of the public representative director’s role, which sometimes seem incompatible. The first aspect is that the public representative director has to help and guide the company and the management as well as the board by bringing in valuable experience in business, expertise and specialisation in the field. This role of an advisor is also considered to have an “enabling” feature.

The second but the equally important role is to act as the “conscience of the board”, reflecting the broad interests of shareholders and other stakeholders for enhancing the quality of good governance. The “enabling” role is of vital importance as it can add value by contributing to the judgment and decisions of Chief Executive Officer and act as a resource for the management.

Besides, a public representative director should ensure that the company has the right CEO. Public representative directors on the board should help the CEO in the decision-making process.

Some fear that public representative directors could turn into watchdogs at the expense of making healthy contribution to the growth of business. But the consensus among corporate experts is that both the roles are equally important.

In the corporate world, two more concerns have been raised in connection with strategic direction and management succession. Generally the public representative directors offer inputs and consider approval to management proposals but they do not get the opportunity to make contributions at the time of the formulation of these proposals.

In this regard, it is their duty to draw attention of the management to the fact that actions should be taken only if absolutely necessary. Though some of these observations may be uncomfortable and inconvenient for the management, the public representative director should not refrain from making them; else he will be failing in his responsibility.

Merging roles

This is the area where the regulatory and advisory roles of the public representative director merge into one. For instance, there are times when there is a need to dismiss a chronically underperforming chief and the public representative may have to take this uncomfortable decision. Another important issue in case of public representative directors is their membership on the remuneration committee and audit committee. There are two aspects of these committees which need to be explained. The first is regarding the remuneration of the public representative directors.

The aspect is that in spite of their access to independent source of advice from outside the company, most of the time they have to rely on information from within the company, which may or may not have been filtered by the management.

Public representatives are presented with several proposals in whose preparations they do not play any role. These proposals may not reflect their perceptions but they have to approve them as desired by the Chairman and CEO.

What this implies is that the watchdog role through the committees is rather weaker. The problem is that public representative directors often have very little leverage. Public representatives often get frustrated in their attempts to elicit more information from the management and end up rubber-stamping the company’s proposals or suggest minor alterations. Of course, they can reject the proposal or ask for a fresh one, but that would result in costly delays.

More teeth

Hence, public representative directors must have a role in preparing the proposals so that they can set the parameters within which proposals can be formulated.

However, public representative directors in India are unable to actively participate in the decision-making due to non-cooperation by the Managing Director or CEO. The fact that public representatives are appointed by the Chairman and Managing Director further confounds the situation.

According to the Cadbury report, public representative directors have to represent the interest of shareholders and have a mandated accountability to do so.

However, there is no evidence in corporate history of shareholders objecting to the removal of public representative directors by the Chairman. It is beyond doubt that public representative directors find themselves in a vulnerable position. As a result experts are not happy to accept such nominations or appointments.

Training

Another important issue is that of training public representative directors. Public representatives often find it difficult to attend board meetings without understanding the code of conduct specified by the board. At least, a couple of months are required to understand the issues and proceedings of the board meetings.

Hence it is of utmost importance to speed up the induction training programmes involving knowledge of board practices and the legal, financial and other aspects along with training in a range of skills which these directors require.

These skills should include:

(1) ability to rapidly identify key issues in an unfamiliar situation, 2) to obtain and grasp the essential information, and 3) to reshape and influence the discussions by intervening constructively.

The information needs of public representative directors differ from those of working directors. The working Executive Director must brief the public representative directors on issues that are likely to come up at the meeting. The executives should provide focussed and unfiltered information on financial and non-financial matters in a clear and unbiased fashion, but at the same time the directors should not be overburdened with irrelevant information and data.

Moreover, public representatives should insist on getting adequate information and the management should be responsible for providing information as required despite the inconvenience caused to the staff. This pays significant dividend to the company.

These views are significant for strengthening the effectiveness of public representative directors but it would entirely depend to what extent the chairman of the company encourages this culture and the managing director willingly facilitates this process.

Assistance to the public representative director should be mandatory rather than voluntary. Hence the contributions made by public representatives can have a real impact only when there is a clear-cut source of authority besides their own personal status and reputation.

The evidence so far suggests that in larger companies with good corporate governance record, the public representative directors’ role is recognised and appreciated.

But in smaller companies, their role is often marginalised, especially if their views diverge from those of the chairman and working directors.

(The author is Chairman of Inter-connected Stock Exchange of India Ltd. and Former Economic Advisor of SEBI.)