When the promoters or top managers of a listed company go rogue, public shareholders usually look to the board of directors to give a rap on their knuckles. The new Companies Act, SEBI’s LODR regulations and the many committees that have attempted to improve governance at India Inc have all focussed on expanding board roles, carving out committees and adding to the responsibilities of independent directors.

But many leading lights of India Inc have been in the spotlight in the last three years for unseemly power struggles, misleading financial statements and outright fraud on lenders and investors. Their boards proved quite ineffectual at safeguarding minority shareholder interests.

Conflicted loyalties

Sniffing out and reining in potential conflicts of interest for top managers is one of the key duties of a corporate board, chalked out in SEBI’s LODR regulations. When there is such conflict, senior managers are bound to disclose their personal interest to the board, for appropriate action. But in the Indian context, corporate boards often prove more loyal than the king.

In the last few months, the MD and CEO of India’s largest private sector lender ICICI Bank has been fielding allegations of conflict of interest and nepotism with respect to the bank’s loans to the Videocon group, which have turned non-performing.

A whistle-blower has alleged that the CEO officiated as a member of a credit committee which sanctioned a loan to the group in 2012. The question is if the lending decision was kosher, given that the CEO’s husband had business ties with the Videocon promoter Venugopal Dhoot, prior to the grant of the loan.

However, as soon reports of CBI initiating an enquiry came up and demands for the CEO to step down (pending the enquiry) were made, ICICI Bank’s board put out a statement absolving her of all allegations of quid pro quo, nepotism and conflict of interests.

But given that its loyalties must first lie with public shareholders, shouldn’t the board have questioned its CEO for the non-disclosure or requested her to step down, until investigations cleared her name?

Pliable IDs

India’s corporate governance regulations rely heavily on independent directors (IDs) to rein in undue promoter influence. There’s a long list of screening criteria to ensure that IDs are not related by blood to the promoters and that they do have pecuniary dealings with them.

But in practise, these elaborate rules have done little to ensure that IDs exercise independent judgment. Quite a few corporate boards feature lameduck IDs who are happy to take the line of least resistance with the promoter. In cases where they do speak up, the promoter or founder seems to have no trouble ejecting such ‘trouble-making’ IDs.

Public sector banks have attracted scathing criticism lately for their over-the-top loan exposures to some of India’s most indebted corporate groups. It is an open secret that ‘phone call based’ lending, where political bosses directed these banks to sanction loans to their industry cronies, is mainly responsible for this. But if you’re wondering why the directors on these banks’ boards didn’t object, it is probably because the IDs on PSU boards are seldom truly independent. Political party members often get appointed to board positions, as political favours. But then, the IDs of marquee private sector companies often bag board seats for their pliant nature too.

During the 2016 boardroom battles at the Tata group, incumbent Chairman Cyrus Mistry was summarily ousted from the boards of series of listed companies after incurring the promoter’s displeasure.

Despite the Tatas not providing any detailed reasons for Mistry’s ouster, many IDs on these boards simply went with the flow. Independent directors such as Nusli Wadia who dissented, were summarily stripped off their board seats.

Given that IDs sit on corporate boards mainly to act as dissenting voices on contentious issues, this method of dealing with dissent certainly doesn’t help the cause of governance.

Ineffectual committees

Two of the most powerful governance mechanisms enshrined in corporate boards are the audit committee and the nomination and remuneration committee, both carved out of the board.

Audit committees, with two-thirds IDs, are required to critically oversee a listed company’s financial reporting, appoint and fix fees of auditors, and review accounting policies and related-party deals. Nomination and remuneration committees, staffed with 50 per cent IDs, are tasked with vetting, appointing and deciding on the pay packages for directors and top managers. But the many skeletons tumbling out in the bad loan cases, of promoters’ siphoning off money to their private accounts and extending loans to failing group entities, suggest that the audit committee oversight is hardly a deterrent to managers window-dressing the numbers.

In two cases of blatant accounting fraud that came to light recently —— at United Spirits and Ricoh India — audit committees seemed to be as much in the dark about the financial irregularities at the listed firm, as other layman shareholders.

The IDs could do little other than resign, after forensic investigations were ordered.

If cases of audit committees missing a trick or two on dubious accounting are rare, those of nomination/remuneration committees approving over-the-top managerial pay and granting CEOs cushy tenures, are all too frequent. Recently, the RBI is reported to have turned down a proposal by the Axis Bank board to grant its CEO a fourth term, after the bank was found by the RBI’s audit to have significantly under-reported its bad loans and was penalised for it. The regulator is also reported to have turned down approvals for hefty bonuses to top managers of NPA-ridden banks.

Fixing it

So, if the board oversight mechanism is not working as it should, what can be done to fix it? Expert groups such as the Uday Kotak committee have proposed a few ideas — further expand the number of directors and IDs, set minimum attendance criteria, set a cap on maximum directorships, and more elaborate board evaluation.

For IDs, there are proposals for annual certification, minimum sitting fees, public disclosure of detailed reasons for resignations, etc.

But as one market veteran who has served on several corporate boards remarked, the concept of ‘loyalty’ is hard-wired into the Indian mindset.

Therefore, as long as the non-executive members or IDs on a company’s board are appointed with the blessings of the promoter or incumbent management, they would hesitate to rebel against their ‘bosses’ or ‘bite’ the hand that feeds them. That the remuneration for IDs is at the discretion of the incumbent management also puts them in the embarrassing situation of negotiating their own fees.

Therefore, the most pragmatic way to ensure board independence in the Indian context, may be for the Ministry of Corporate Affairs to create a curated public roster of ‘fit and proper’ professionals, from which listed companies must select their IDs.

It can specify the sitting fees for directors and IDs to avoid excessive or inequitable compensation. There can be minimum professional qualifications prescribed for board members who sit on the audit or nomination/remuneration committees.

Of course, it goes without saying that the government itself must stop handing out board positions in listed PSUs as a reward for loyalty or political affiliations.

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