If you spend days diving into annual reports while researching Indian boards and corporate governance standards, here are some questions you are bound to ask.
- IT major Infosys’ nomination committee chose yet another co-founder as CEO— is it dynastic succession of another kind?
- Was renowned Professor Krishna Palepu in the know of the financial misadventures of Satyam’s Ramalinga Raju?
- What value do gents like Prof. Mohammed Salahuddin Ansari, Principal, Madhupur College, Jharkhand and Dr Deva Nand Balodhia, free lance journalist, ex Officer on Special Duty to CM Uttarakhand add to the State Bank of India board that they sit on?
- What are people like Shahrukh Khan, Yash Chopra, and Javed Akhtar doing on the board of Jet Airways?
- How does leading lawyer Suresh Talwar, manage to find a place on more than 50 boards of listed and unlisted companies?
- Why do many large Reliance ADAG companies like Reliance Capital, Reliance Communication, Reliance Natural Resources, and Adlabs, have just five (Chairman Anil Ambani plus four non executive directors) people on their boards while the Andhra Bank board seems to require 19 members?
Hidden in some of these questions are the reasons that have led to corporate governance being reduced to mere lip service in most Indian companies. But exceptions remain.
In response to the Infosys succession question above, Co-Chairman NR Narayana Murthy demonstrated why his company is considered the gold standard in corporate governance: he got Claude Smadja, the then chairman of the nomination committee to send a detailed answer to explain the procedure of election of Kris Gopalakrishnan as CEO. And yes, Mr Palepu wrote back too, defending his actions as an independent director. His note said: “During my tenure as a director with Satyam, I fulfilled my responsibilities fully and appropriately. I look forward to providing my complete co-operation to regulatory agencies as they investigate this matter. The actions of Mr. Raju and his brother have caused Satyam, thousands of Satyam employees, customers and investors, and India, enormous damage,”
While in this sea of stink there are shining examples like Infosys, Wipro, Mahindra and Mahindra, Godrej, Bharti, ICICI Bank, HDFC Bank that have set themselves apart, they are few and far between. As one moves down the ET 500 ranking, the standards begin to fall. No doubt, corporate governance standards are far too complex a matter to be captured in plain numbers, but numbers do tell a story. More than 70% of ET 100 boards don’t have women in their boards and of the 2211 BSE listed companies that have filed data with the Exchange only 4.9% of all directors are women. More than 70% of the ET 100 boards still haven’t split the Chairman and CEO posts. More than 80% of ET 100 boards still don’t have lead independent directors in place. The fact remains that hundreds of listed companies still have to comply with clause 49 norms; in BSE itself there are 390 companies still to file data.
Governing The Corporate
And now research by an investment bank proves what industry watchers have suspected all along: large-scale manipulation of accounting standards. A report by the Noble group says that one in five BSE 500 firms has accounting issues — companies tamper with revenues, manipulate sales and play around with cash. So are the members of auditing committees of these companies sleeping? No, the independent directors say, they have to rely on the management for information, and often information and time is short supply in board meetings. “For some promoters, revenues are a matter of opinion not fact and somehow they always have to rush to meetings after the board meetings. We have no choice but to take the management’s word for most issues,” says the CEO of a company who is on prominent boards.
The fact remains that all three pillars of protection for investors — the independent directors, the auditors and the regulators are misaligned. “The institutions of corporate governance are not good enough. We have to reapply ourselves to restructure the institutions of corporate governance,” says Arun Maira, Senior Advisor, BCG who is on five boards. And corporate governance (which in its true form starts after basics like board composition, size, committees, systems of check and balances, have been put in place) is often just reduced to meeting the minimum legal requirements in most cases. “Only the ritualistic portions of corporate governance are being met with, I haven’t seen a material change in thinking towards corporate governance,” says N Vaghul, Chairman, ICICI Bank, one of India’s most respected business leaders.
THE PROMOTERS’ PLAY
Boards historically have been networks of influence for promoters, so family and businessmen friends are often nominated, leading to a cosy relationship in which both objectivity and independence are lost. Indian promoters, unlike in the West, hold large equity stakes and to quote a well known CEO of a FMCG company who is on several boards himself, still have an ‘I know what’s best for my company’ attitude. Many crafty promoters assemble the boards in such a way that it’s a culture of ‘collective consent’ and independent directors are mere pawns. “In promoterled company boards, the level of independence of independent directors is considerably limited. That’s what the Satyam episode brought into sharp focus. But in many companies with diversified ownership, the approach of the board is sharply different and independent directors often have differing views,” says Vaghul.
However, there are a few promoters like Sunil Mittal who actively scout for competent independent members and make sure that the board has differing voices. “I have personally introduced people to promoters who were looking for board members with right credentials and are the right fit for their boards. There are enough large Indian groups who are on a lookout for the right kind of directors,” says Naina Lal Kidwai, Group General Manager and Country Head, HSBC who also serves on Nestle’s global board.
It’s a well-known fact that Indian businessmen and executives crave for directorship and promoters know it too well. Promoters know that the combination of money, perquisites, and bragging rights of being on a prominent board combined with non-financial leverage of being from the same social circle often make directors fall in line. And god forbid, if the promoters find that a particular independent director is erring or asking the right questions, the person is simply not re-elected. But then, have you ever heard reports of directors leaving a company in the media? It often goes unreported, so when three IOC directors quit the board in quick succession, no one noticed. However in companies like Infosys, the co-founders go an extra mile to make sure that independent directors are not influenced by promoters.
In this day and age of globalisation, corporate governance is high on every board’s agenda or at least the façade is maintained. Promoters have been quick to crack the corporate governance code because boards with the right names provide the ‘shine effect’ that helps in many ways, including getting FII money. So in the last five years, they have been quick to window dress their boards with academics, consultants, women (for diversity), and international personalities but old and faithful favourites like CAs, bureaucrats, and lawyers still remain permanent fixtures.
Interestingly, Indian boards have their own quirks and preferences too. Satyam’s earlier board had a clear proclivity for Telugu speaking gents. Though these preferences don’t affect the independence of the board they point to interesting possibilities. For example, some big Parsi business conglomerates still retain a certain percentage of Parsi board members. To check if the religious undertone play out, we sift through boards of promoters belonging to a particular community — Wipro, Mirza Tanneries, Wockhardt, and Cipla — and thankfully there is no religious undertone and boards are diverse. But yes, many boards show clear regional preferences, especially Gujarati and some traditional south Indian companies. That’s largely for the sake of convenience of board meetings, say promoters. Sometimes clannish behaviour also creeps in. For example, a large North Indian group’s board had majority of members who belonged to a particular sect in Punjab.
And those who are still wondering about Shahrukh Khan, well, the actor, playwright Javed Akhtar, and film-maker Yash Chopra were hitched on the Jet board after the Jet-Sahara deal fell through in 2006 and according to the 2007-08 annual report Shah Rukh Khan didn’t attend any meetings in the financial year (he was not paid any directors fee or commission but paid Rs1.64 crore as advance for television ads) and interestingly, the two members on the audit committee of the airline are Yash Chopra and Javed Akhtar. As you sift through still more annual reports looking for promoter quirks, more questions begin to bother you. Why do some large groups still have promoter’s mothers as Chairmen? Well, we are like that only.
Quiz Reliance ADAG about the size of company boards and the spokesperson’s response reads like this: The Reliance ADA Group companies have a compact but optimal composition and size of Boards so as to ensure Directors’ full commitment and time for focussed participation in the companies’ affairs, rather than holding routine meetings.
THE INDEPENDENT DIRECTOR’S MYTH
A lot of corporate governance problems stem from the fact that competent and experienced independent directors who can add value are very few, so there is clamour for the few good ones. Popular board member choices like Rama Bijapurkar, Omkar Goswami, N Vaghul, Ashok Ganguly, Keki Dadiseth, Tino Puri, Aman Mehta, Cyril Shroff and Nimesh Kampani have multiple board memberships. Just the five ex-Hindustan Unilever Chairmen, SM Dutta, Ashok Ganguly, Keki Dadiseth, and Vindi Banga (still in active service in Unilever global) would be on more than 30 boards of listed and unlisted companies. But the guys who beat everyone to it are the lawyers from Crawford Bayley, like RA Shah. If all the directorships of lawyers in the firm are added up it would tot up to three figures. “We have to expand the existing pool of directors and companies have to take proactive steps to do that otherwise boards will not have fresh talent,” says Anjali Bansal, CEO, Spencer Stuart.
But the catch here is that many of the independent directors, unlike in the West, are not wealthy in their own right, so a substantial amount of their income is related to board activities. Some popular board members in India make decent money, like Omkar Goswami of CERG Advisory who sits on multiple marquee boards; his fees according to 2007-08 annual reports from just three boards — Infosys, Dr Reddy’s and Crompton Greaves — was Rs 90.73 lakhs, and he received 3000 stock options from the pharma company too.
The selection of directors in Indian companies remains arbitrary in most companies and lacks thoroughness; often promoter’s writ runs large. In contrast it’s a much more thorough process globally. Kidwai says that her selection and induction into the Nestle global board took nearly a year. “First, they made background checks, then the nomination committee cleared my name, and after that I was approached for consent. Five months before I formally joined the board I was called to meet all the board members. Three months before joining I had to go for a three-day induction program for new directors to develop a deeper understanding of the company and its strategy. Only then I went to the AGM,” she explains.
It would also be unfair to say that some esteemed people don’t refuse directorships. There are a group of people like Tino Puri, the former chief of Mckinsey India, who has stepped down from directorships in prestigious companies like Patni and Godrej because he wanted to cut down on board assignments due to time constraints. But the independent directors are not a particularly happy lot and with the Nimesh Kampani-Nagarjuna Finance episode, along with the Satyam fiasco, looming large, many are questioning their role. “We just don’t want to be another name, we are being abused,” says Vaghul. “I am also dissatisfied with the way we are discharging our duties. We are only going by what is produced before us by the management. In the last few days, I have been grappling with these issues myself.”
Independent directors complain that it’s the companies’ attitudes that defeat the very purpose for which they are on boards. While many independent directors hem and haw, Professor Nirmalya Kumar of London Business School, calls a spade a spade. “To do a job well one needs information and time. For information, one has to be able to rely on the auditors and management. For time, one has to be paid as a good director will need to spend one day a month on the company. Few Indian companies are willing to compensate for that,” he says.
THE R FACTOR
The third element of investors’ protection — the regulatory environment, also has some serious lacunae that some companies take advantage of. Take for example Section 372A of the Companies Act, which says that while the company can invest 100% of its free reserves without even a special resolution at a shareholders meeting, it can’t change the name of the company without one. After the boom run, many Indian companies, especially in IT, have more money on their balance sheets than some mutual funds. Then there are other inscrutable laws that make it easy for promoters to bypass boards. “Regarding quorum requirements, Section 287 of the Companies Act says that one-third of the total strength or two directors, whichever is higher, is the necessary requirement for a board meeting. So the requirement of having an independent director is not adequately matched by the quorum requirements in the Companies Act,” says corporate lawyer Rohit Kochhar, Chairman and Managing Partner, Kochhar and Co.
Similarly, the auditor’s role has come under heavy scrutiny in the Satyam aftermath, and the auditors PWC acknowledged that Satyam accounts were unreliable. A closer look at the fees of accounting firms also shows a disturbing trend. “A majority of listed firms paid the accounting firms much more for other services than auditing fees,” says Saurabh Mukherjea of Noble. So the relationships run deep and with the system of relationship managers that some accounting firms have started to follow, objectivity and arms-length relationship may have been a casualty. But the fallout of Satyam may have one positive — there may be a renewed focus on corporate governance. Many like Vaghul believe that this might just be the watershed event for that change to take place.
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