Independent directors as cheer leaders
Business Standard published a story by Sucheta Dalal last week on how a director of an IL&FS subsidiary was threatened to be put in jail and was harassed for asking uncomfortable questions. In a company where 92.83 per cent shares are being held by institutions (of which LIC has 25.34 per cent and ORIX Corporation of Japan 23.54 per cent), such an incident is unimaginable. One may argue that the incident is an aberration and this does not happen in most companies. It might be true that such incidents do not occur often. But it is not unusual that dissenting voices are suppressed in board meetings. Independent directors who ask uncomfortable questions are thrown out of the company. Removal of Nusli Wadia from the boards of subsidiaries of Tata Sons demonstrated how easy it is to remove a director who asks uncomfortable questions. Directors are appointed and removed by ordinary resolution (simple majority). Retail shareholders lack motivation in voting on resolutions placed in general meetings. On an average 1 to 4 per cent of retail shareholders vote, even when e-voting facilities are available. Therefore, if the dominant shareholder, who may own much less than 50 per cent share in the company, casts 100 per cent of its votes in favour of the resolution, simple arithmetic shows that more than 50 per cent of the votes polled will be in favour of the resolution. The situation might be different in a company that has significant institutional shareholding and institutions cast their vote conscientiously after due diligence.
We should not expect an independent director to present his/her dissenting views strongly if those are ruthlessly suppressed by those in power. He/she will prefer to resign rather than express dissenting voice or insist for recording dissent note in the minutes of the meeting. Mass resignation of independent directors of a company might give signal to the market that something is wrong with the company, provided the media follows the company, because it is of public's general interest. But resignation of an individual director, ostensibly for ‘personal reasons’, does not provide any signal to the market.
An independent director usually does not act as a whistle blower, because there is practically no protection to whistle blowers. In crony capitalism, business people have enough power to harass an individual with the support of government officials and often by using muscle and money power. None other than a crusader will expose himself/herself to the risk of being harassed.
Independent directors also lack motivation to carry on their responsibilities diligently. The board process is opaque. Therefore, outsiders do not know how a director behaves and contributes in the board meetings. For example, R C Bhargava has earned his reputation for successfully leading Maruti Suzuki. However, it is not within the public knowledge how he acted on the board of Infrastructure Leasing & Financial Services (IL&FS) and how much time and attention he devoted to the company. This is one of the reasons that independent directors do not have enough motivation to devote adequate time and attention for carrying out their responsibilities. Often it is said that independent directors lack motivation because they are not adequately compensated. Although this might be true, it is also true that if the compensation (including perks) forms a large proportion of the current total income of the director, he/she might compromise with independence to ensure continuity of income.
Independent directors are unlikely to be independent, because they are appointed with the tacit approval of the incumbent management or the controlling shareholder. Nomination and Remuneration Committee (NRC) has the responsibility to present the board’s nominees before shareholders for election. NRC rarely acts independently. Consequently, nominees are either known to the incumbent management or the controlling shareholder. In the Annual General Meeting (AGM), only board’s nominees are elected even if the controlling shareholder holds less than 50 per cent shares in the company. Therefore, independent directors owe their allegiance to the incumbent management or the dominant or controlling shareholder.
Courts never relook business decisions. Therefore, independent directors have no liability for poor business decisions, including poor risk management. Independent directors are liable only for the omissions and commissions of the company, which were in their knowledge or to which they were a party.
In the current situation, most independent directors are sympathetic to the management, rather than to shareholders and other stakeholders. They act like cheer leaders. After semblance of serious deliberations, they cheer for (vote for) every resolution placed before the board by the management.
Courts never relook business decisions. Therefore, independent directors have no liability for poor business decisions, including poor risk management