Truth to power
Indian boards need to take fiduciary duties seriously
India Inc’s relative institutional immaturity is showing in the almost wholesale abdication of responsibility by corporate boards in recent months. The brewing crisis in Infrastructure Leasing & Financial Services (IL&FS), the conflict-of-interest issue involving the chief executive officer (CEO) in ICICI Bank, or the sprawling scandal involving Fortis Healthcare and the promoter family are symbolic of the abject weakness of the India corporate board. All of these examples raise concerns about the vigilance of board members, and, indeed, whether they take seriously their fiduciary responsibilities as clearly set out in Section 166 of the Companies Act, 2013. The truth that appears to reveal itself in case after case is that corporate boards tend to be moral hostage to promoters or powerful CEOs. This applies as much to executive directors as to independent directors, who have, by virtue of their positions, the unique ability to ask hard questions.
But for most, board directorships are well-paid sinecures. Fortis Healthcare’s embattled co-founder Shivinder Mohan Singh was honest enough to admit that boards “know nothing”. Eighty per cent of its time, he added, was spent on ensuring regulatory compliance rather than conducting business. Mr Singh’s statement reflects only a partial truth. It is true that much of a company’s integrity depends on the character of the CEO/promoter and the degree of disclosure they permit, a fact that the fraud in Satyam, its board glittering with international luminaries, proved so comprehensively. Also, when Indian companies, whether family-owned or widely held, tend to structure deals through myriad subsidiaries, it would be impossible to expect the board of the holding company to know operational details.
But, as the controversy in ICICI Bank and, before that, Infosys demonstrated, boards react ineffectively (and opaquely) even when they do have access to controversial information. In both companies, for instance, whistle-blowers provided detailed information about questionable practices. In both cases, the boards chose to put out opaque statements that satisfied no one. In Infosys’ case, sheer promoter pressure forced the chief executive officer (CEO), Vishal Sikka, to exit; in ICICI Bank’s case, growing shareholder dissatisfaction forced the board to start a full-scale independent investigation against Chanda Kochhar, which is underway. In IL&FS’s case, the board’s role is even more debatable. Here, too, a whistle-blower’s letter concerning corruption in ground companies is in the mix. But that apart, IL&FS’s woes have been attributed to delayed payments by government agencies, stalled projects owing to litigation, and similar issues. These, surely, are standard operating conditions for anyone operating in infrastructure in India, and CEO Ravi Parthasarathy, who stepped down in July, citing health reasons, has been in this business for three decades and should have been well aware of these contingencies.
Part of the existence of a weak board culture is that corporate institution-building in India is still in its infancy and Indian cultural mores, especially in family-managed firms, do not accommodate the practice of speaking truth to power. Though far from perfect, boards have been the capstone of corporate ethos in the developed world. From Apple’s charismatic co-founder Steve Jobs to Hewlett-Packard’s powerful CEO Carly Fiorina, there are any number of CEOs who have been sacked by the boards for acts of omission, commission, non-performance and fraud. In India, such examples are about as easy to find as the dodo.