Opinion

Independent directors and brand reputation

R Anand/V Ranganathan | Updated on August 16, 2020

Preserve image for posterity’s sake   -  Getty Images/iStockphoto

Independent directors can play an important role in keeping out negative perceptions about a company

One of the standout webinars conducted during the lockdown was by Suresh Narayanan, CMD of Nestle India Ltd. He explained how the Nestle brand and reputation is close to the heart of each employee and driven by a top-down initiative of protecting the reputation at all costs. This led us to a tricky journey of exploring the role of independent directors (IDs) in looking closely at the reputation risks of companies when they sit in board/committee meetings.

Most risk management discussions focus on market risks, interest-rate risks, compliance-related risks, high growth rate risks etc. Discussions on reputation risks are minimal, if at all it, and at the periphery. Corporate reputations are built brick by brick over time, but can be destroyed overnight by one false move or misadventure. Hence there is an unwritten responsibility cast on the board of directors to zealously guard the reputation of the company.

One of the early lessons on this subject was in one of our first jobs, where the MD of the company dictated that advance tax instalments have to be overpaid, and before time. Any interest payment for short remittance was internally viewed seriously and considered a punishable offence. In one interesting board meeting, an ID was curious to know the list of creditors not paid for the last 30 days. The reply he got was that the focus was on collecting from debtors, and hence there were outstandings in payment. The ID retorted — collecting dues from debtors represents working capital management, but paying off creditors on time represents reputation management. A simple and profound statement invariably lost sight of. In dealing with the government and regulators, how facts are presented has a direct bearing on the reputation of the company.

Legal opinions, judgment calls

With laws and regulations being complex, there is always a dilemma on the part of the management on which of the several views to take, particularly in tax matters. Multiple legal opinions are taken, but finally it boils down to the ability of the company to fight, up to the Supreme Court. It is here that IDs play an important advisory role in using legal opinions to take the necessary risks and the consequential reputational damage it can cause.

The safety-net approach in getting a favourable opinion but erring on the side of conservatism by paying the taxes and protecting corporate reputation is one route advocated by some IDs, and has been well appreciated in some quarters. Likewise, issues relating to corporate laws and governance are more hygiene-related than legal. While it is handy to take legal opinions for self-defence on such matters, the sagacity of IDs come into operation in dealing with whether to go purely by the legal view or take into account the perception factor behind such a move. The key question to ask is: Will such an interpretation, though backed by a legal opinion, lead to perception or reputational issues? If yes, then there should be no further discussions.

More often than not, these are the clear instances where IDs can make a profound impact on the long-term preservation of the brand and reputation of companies.

Financial disclosures

The most critical, if not the only, attribute of financial statements is credibility and trust. Irrespective of the actual financial performance of an organisation, if the stakeholders know the financial report is trustworthy, that in itself enhances the credibility and reputation of the company and the management. In the Indian context, it has come to light that out of the top 500 listed companies, only 73 companies’ financial reports are entirely trustworthy. This is not a flattering figure, especially given that capital markets are key in channelising public savings into companies. It is a fact that Indian companies and managers are shy of complete disclosures and try and stick to the rulebook, rather than treat them as a means of communication of company’s values to its stakeholders.

Often, companies feel disclosures compromise competitive position and qualifications, or comments by auditors condemn competence. It is quite a common occurrence that treatment of certain transactions in financial records may be open to differing views, and the company zeroes in on a view which is favourable to it. In such instances, auditors are happy to take letters of representation from the management and skip the explanation of potential implications of the alternative treatment. It is here that IDs should step in and convince the board to enhance the quality of disclosures.

Some of the corporate scandals are attributable to poor and sketchy disclosures and compromises by the board and auditors. In the case of ICICI Bank, where a whistleblower disclosed certain questionable actions of the CEO, the board was seemingly in a hurry to hush it up with an internal enquiry. Later on, the case became complicated and thesituation escalated. In this case, the IDs in question had an important role to play in protecting the reputation of the company. The role of the board, and more importantly the IDs, is not just to tick the box on basic compliance but act as custodian of the reputation of the company.

Brands and reputations are preserved for posterity, and not only for valuation. They need constant monitoring. There is an old story of the TVS brand and reputation. The bus service from Madurai to Pudukkottai would start at a designated time. The locals could set their watches on the basis of when the bus would leave the point of origin. The reputation of honesty and punctuality are built on such foundations. In today’s world of chasing numbers and delivering profits, boards and IDs should always keep in mind how all activities and decisions address the invisible golden egg, viz reputation.

The writers are chartered accountants

Published on August 16, 2020

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