Ranjan Tiwari, Chairman and founder of a mid-size polymer and processing company in Gurgaon, is in a dilemma as to the type of director he must hire for his company's board. He understands the challenges he will face with the board's dynamics and the new CEO. Tiwari has been a member of other boards in the past and knows that the effectiveness of the board drives a company's future success.
Across India, promoters are faced with similar challenges. The stakes are so high that recently the Prime Minister, Manmohan Singh, called on corporate India to improve business responsibility as the country reels from the consequences of scandals coming to light, while emphasising the need for stronger board governance.
In reality, board member selection is biased towards CEO desires, and the company's interest does not necessarily come first. In other words, board members are picked based on their equation with the CEO and the rest of the board hiring committee rather than their wisdom to challenge the status quo .
“Over the years, board membership has become a status symbol. There is a lot more that directors have to accomplish before they claim victory,” Tiwari said as he highlighted the need for a long learning curve for board aspirants.
The selection committee accountable for choosing independent board members may not be as autonomous as it appears. To safeguard the best interests of the shareholders, who, above all, are financial risk-takers, the role of the selection committee is to identify future board members who have the wisdom and capabilities to challenge situations and simultaneously work with the CEO to achieve the shareholders' intended results.
As a result, the position of board members has become a double-edged sword — they need to maintain their distance with the CEO and yet represent the shareholders without disturbing the board's eco-system. “The flaws in the selection process of directors are worsened by the passive role members play,” said Tiwari, citing a frustrating instance where the board's ineffectiveness resulted in lost growth opportunities.
In line with the expectations of the CEO, directors tend to go along with the his or her decision. If the strategy has serious flaws, the board may not challenge the CEO's rationale or his subsequent performance. Dependence on the CEO's knowledge drives their arguments. Nevertheless, deep inside, it is the CEO's role in appointing the board and continuation of a member's service on the board that drives an individual's decision.
“We did not want directors to be involved in influencing strategic decisions. Anyone who challenged the strategy did not last long,” says Purushotham Nagappan, the CEO of a technology company in Bangalore. He adds, “As a founder, I wanted the board's advice only when we ran into trouble. We knew our products and clients well. At least, that's what I thought until one day we had a public relations disaster.”
Lack of operational effectiveness
Operational reviews take up most of the time allocated for board meetings. The board seeks to ensure that the CEO fulfils his obligation to the shareholders' while maintaining cost integrity. However, when directors have financial interests such as a venture capital representative owning a sizable portion of the company, they tend to insist on higher levels of scrutiny and are less tolerant of poor performance.
“We knew board processes had to improve fundamentally if we were to demonstrate top-notch corporate governance,” said Tiwari, reflecting on his early days with the writer.
The Value Advisory Framework, an effective technique to motivate senior executives, is an important decision-making tool that mature boards use. The framework allows CEOs to draw out the context, assumptions and possibilities in line with the board's understanding of the issue. The process facilitates the board to collectively evaluate alternative decisions and make constructive recommendations.
The directors' acceptance of each other is a critical factor in an analysis of a CEO's progress. Board members must shift from an individualistic approach, often a result of their skills, to progressive context-based facilitation. Perspective-based teams developing integrated ideas significantly improve the quality of the board's decision. It is a shame many boards continue to operate individualistically.
While some independent directors feel obligated to the CEO, they utilise their board status as a networking opportunity in their self-interest, often at the expense of the company. Teamwork is critical to a board's performance. Whereas their type ‘A' personality and individualism has brought them to the board, members must collectively feel responsible for the outcome.
approaches to an effective board
“What kind of a board of directors should I hire and at what stage?” is a common question the writer is asked. Not all boards are created equal. At the very least, boards must review company performance. The board structure must change years ahead of a company's anticipatory goals that are necessary to drive results. Boards that encourage directors to take an inside-outside-inside approach to future growth often perform well. Shaping such high potential boards requires expertise of a different kind.
Minimalistic board: The board meets on a calendar basis to review the CEO's presented position, provides snapshot risk review, and makes strategic suggestions.
The board does not take responsibility for detailed reviews but simply accepts the CEO's agenda as given. No assessment is made of the quality of the CEO's decisions, the company's direction, or other independent reviews necessary to truly represent shareholders.
Committed board: The company appoints an expert to the board for a specific period to shape strategic decisions such as long-range planning and new market entry and remain through the execution phases of the strategy. These members are professional consultants, including retired C-suite executives with vast experience in achieving shareholder value.
Professional boards: The board acts as an extension of a company's strategic group committed to realising the shareholders' vision. Their involvement is deep and members are committed to transforming the company's future.
Unlike the other two types of boards, the professional board's responsibility runs far beyond decision episodes. This group acts as a front-end for public relations, influences corporate development programmes, rolls up its sleeves and conducts detailed analysis to realise strategic goals.
“Bringing on a business expert to the board has shown signs of achieving shareholder value,” Tiwari says of his company's decision to appoint a professional adviser.
The future of India's economic success depends on the mid-size company's ability to grow. A board's capability to hire directors who do not hesitate to dismiss (or take action against) chief executives for poor performance, in line with Western practices, is a critical factor in defining India's business success.
Indian mid-size companies have corporate deficiency and it is time their boards stepped up to the task at hand. Right now, the weakest link in a company's future growth is not a lack of talent, competition, or customer demand. It is the director's inability to adapt to the new economic imperatives.
Adapting to new board practices elevates the directors' reputations, an important barometer for improving the value of brand India.
Remember, board membership is meant to be a trust for the company's future and not a gift for past success.
(The writer is Managing Director, The Business Labs. He can be reached at>firstname.lastname@example.org)