‘No one is trained to be a board director in India’

The International Financial Corporation, a World Bank Group company, is an active and one of the largest investors in private-sector companies across the globe. IFC’s rigorous due diligence prior to investing in any company is well known. An assay of the quality of corporate governance is an integral part of the exercise, say Vladislava Ryabota and Lopa Rahman, corporate governance experts at IFC. In a one-to-one interaction with BusinessLine , Ryabota and Rahman discuss the various governance aspects looked into before investing. Edited excerpts:

Companies with no identifiable promoters have powerful key management personnel (KMP). Is a promoter necessary?

Both of us are corporate governance officers; we are on investment deals; we identify the risks related to corporate governance and then structure the deal accordingly. We try to establish a professional board of directors with good checks and balances, independent directors and these should be truly independent.

IFC’s own definition of independent directors is more stringent than India’s, we ask the company to find independent directors according to our definition. Sometimes, in equity deals, we take a board seat. We try to see that no individual person or group has absolute power.

Are boards/directors being really evaluated?

Companies take different approaches; some just tick the box that they have done evaluation.

We have also seen companies with very good sophisticated questionnaires/statistics in their report. while some engage third-party evaluators.

If you were to do it right, it is time-consuming and engaging. We recently evaluated the board for a company in Bangladesh; it took us several months, because we developed a questionnaire, interviewed each director, did the workshop.

Our corporate-governance scorecard has several questions on board evaluation. Companies have to evaluate and disclose, besides creating an improvement plan for the board which signals to investors that they are working on it. We just don’t trust the evaluation of those who do it in five minutes.

What recourse do you seek so that there is credible deterrence for the risk of bad conduct from KMPs/board members?

We have a rigorous integrity due diligence (IDD) process even before we sign any document, be it advisory or investment. Sometimes, we even hire a third party to do the IDD. We check all external as well as internal records — whether there has been any scandal, whether any employee was removed (and this is a global search). If anything gets picked up, we ask what steps were taken. We even ask people with integrity issues to be removed.

Moreover, we ask them to make their policies enforceable and help them refine the policy if needed. We also look at the quality of internal audits.

How do you influence remuneration so that it is motivating without harming investor interest?

When we check performance evaluation, we need to see that the remuneration is linked to the long-term plans of the company. We have pushed back from companies on that because most CEOs want their salary in a year.

Is fiduciary duty still around in company boards?

If you talk about the world, it is blossoming in the state of Delaware in the US; they even have a case where they stated that majority shareholders have fiduciary duty to minority shareholders (in addition to board members). This is the extreme in best practices.

In India, I have not seen many cases; may be because the law is new, there is not enough court practice. We are educating the market what it means to be a director at a company.

The challenge in India is that nobody is trained to be a director. They are called to the boards for their technical skills and relationships, but no one has actually taught them as to how to have this group of sophisticated, charismatic people effectively work together.

Every time we ask a director in India when was the last time they attended a training programme, they get offended. They think once they are appointed, they don’t need to be educated at all, they know everything.

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