The Hindu Business Line : Changing dynamics of the company board

The natural consequences of global consolidation and international competition are systemic and un-systemic risks, and these are on the rise. The market share of companies are changing due to innovations in products and services, marketing and distr ibution technology changes and movement of consumers across borders.

With such revolutions happening, companies cannot afford to take wrong decisions or delay implementation of key policies.

Hence the emerging scenario warrants strong company boards comprising efficient directors with specialised knowledge. The role and functions of board directors are, therefore, widening.

Role and functions

Directors, besides their fiduciary duties and the responsibility to take care of the interests of the company (shareholders), have to protect the interests of employees, creditors and regulatory bodies (compliance). In addition to crafting strategies to meet global competition and absorbing technological advancement to enhance the overall performance, they have to look at corporate governance issues such as responsibility towards society.

The law prohibits board members from putting themselves in a position wherein their personal interests clash with those of the company. In this context, here is what Cadbury Report states: “Every public company should be headed by an effective board which can both lead and control the business with future vision and no personal interest. This means a combination of executive director and outside non-executive directors.”

Some professionals claim that what benefits shareholders, benefits other stakeholders too. So the focus is often on serving the interests of the shareholders rather than improving the prospects of the company.

In fact, a board’s top priority must be the welfare of the company at any given point. Experience shows that only few boards devote time to study the growth and diversification prospects of their companies in the long term, say, over a 25-year horizon. Broadly speaking, directors have to work as trustees of shareholders’ investment.

ED and NED

An important component of the board is executive and non-executive directors. While an executive director (ED) functions with executive powers and has access to important information of the company and its infrastructure, the non-executive director (NED) works as a guide without power and are on the board only because of reasons such as personal relationship with the executive chairman and managing director and seldom on the basis of merit and professionalism.

This practice needs to be corrected. Merit-based nomination offers value addition to the brand equity of the company.

Excellent co-ordination and mutual understanding become an issue in many companies. A dynamic chairman will hold at least some of the board meetings at sites away from the headquarters, in order to get EDs and NEDs understand each other in a way that cannot be done at formal meetings (and incidentally give a taste of the operating realities of the business).

Ironically, even after years EDs and NEDs find themselves strangers as far as their understanding of issues is concerned. One is not saying that they should think alike, but they should at least posses symmetrical informational inputs. There is no point in presuming that the two groups have the same interests and roles. The fact that some of their accountabilities are identical should not blind us to the reality that they are on the board for different reasons, and have different parts to play.

In fact, the idea of constructive opposition as a role for NEDs is not such a bad one; but they ought to strive hard to understand the views of EDs and give suggestions on issues directly or indirectly. If this does not occur, the board and the chairman cannot be said to be doing their job properly.

Chairman APPOINTMENT

An emerging issue is the appointment of the chairman. The question is whether the practice of appointing the dominant shareholder as the company chairman is better for the smooth functioning of an organisation, or is appointment of the non-executive chairman who can discharge his duties in a fair manner a better bet.

Now there is an emerging view that the chairman should be the non-executive chairman, particularly a public representative director with adequate power and no material relationship with the company.

The non-executive chairman can play a pivotal role in co-coordinating the views of the board members. He needs to be a leader in the real sense and generate new ideas and strategy for the company’s growth, by inducting new technologies and innovations.

However, a non-executive chairman is generally in a vulnerable position even if he has the expertise needed by the company. The non-executive chairman is merely a presiding officer with fiduciary duties, but with no power to direct the board members to take decisions that could help in the company’s growth. The non-executive chairman functions as head with no role in the operations.

There are several cases where companies have incurred undesirable expenditures and kept secret sensitive shortcomings and weaknesses. But the non-executive chairman, unfortunately, cannot lay hands on such information.

These issues should be taken up by the chairman. Else, in the long run, the company along with common shareholders will suffer even as the major shareholders and executives reap the benefits.

Auditors have to be more vigilant and accountable to point out such issues in their report to the board.

The regulator has to make some amendments in its corporate governance laws so that the board of directors and non-executive chairman can work effectively.

(The author is Chairman, Inter-Connected Stock Exchange of India.)

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