Companies need more neeti, less niyam
Last week, the director of GDJK delivered a rodomontade by reprimanding independent directors for failing small shareholders. For the unschooled, GDJK is Gambhir Dhokadhadi Janch Karyalaya, aka Serious Fraud Investigation Office. Though not free of weaknesses, independent directors serve as punching bags for pontificating speakers.
Mythology instructs us about the perpetual tension among the devas (gods), asuras (demons) and praja (citizens). Mahishasura had won a boon that no man or animal could kill him, so he wantonly tormented the praja. Durga, the female form, was incarnated to kill Mahishasura. This is the story of the current Navaratri festival. Listed companies also experience tension among three shareholder types: Majority, minority and institutional. Regulators play God, so there does exist tension among the players.
Last month, I alluded to PWC research and an article in Strategy + Business about four patterns of bias among directors — namely, authority bias, groupthink, status quo bias, and confirmation bias. Behavioural influences in boards are subtle, unlike legal, accounting, and technical influences, which are more in-the-face.
Twenty years ago, Warren Buffett famously “blamed boardroom atmosphere for governance failures by otherwise intelligent and decent directors.” What did he mean? “The nature of boards is that they are partly-business organisations and partly-social organisations. Directors behave, partly with their business brain and partly with their social brain. Being effective at a part-social and part-business organisation may well require a director to play politics.”
Although listed companies have three broad classes of shareholders, the board is required to consider the interest of all shareholders, though each class of shareholder is also a constituency. Every director must follow what Gandhiji had said about decision-making when in doubt: Think of the weakest or the poorest person and ask if the decision will benefit that person. If the board applied this principle to any imbroglio, a fresh perspective would emerge — for example, in the Zee Entertainment and Invesco tangle, or in the Dish and Axis imbroglio. Those cases, however, are not the subject of this article.
Majority/promoter: Like the Marathas perceived themselves as the risk-taking conquerors, promoters’ self-perception is that they are risk-taking entrepreneurs. Promoters tend to behave in a clannish manner whenever there arises a dispute between one of their ilk and the management or other shareholders. Recall the fight between S P Acharya and Manu Chhabria for the control of Shaw Wallace during the 1980s or how India Inc reacted when Swaraj Paul tried to take over Escorts several decades ago.
Promoters also behave dynastically. In a public debate in Kolkata, the chairman of a family-run, listed company brazenly asserted, “This company belongs to my family, I took over from my father, and my son will succeed me. We engage professionals to implement our decisions and to manage.” He came through like a Maratha, who appoints Peshwas to administer conquered territory. Possibly he would avoid having independent directors if regulations did not compel him!
There is, on the other hand, the emergence of the PEM —professional entrepreneurial manager, a hybrid professional-entrepreneur. Think of Prakash Tandon (HLL), Ajit Haksar (ITC), and Champaklal Choksey (Asian Paints), whose actions exemplify that behaving entrepreneurially is not the preserve of a business family, and that you don’t need to be an MBA to act professional. There exist successful companies run by PEMS with no majority shareholder like HDFC, L&T, and ITC; occasionally, such a CEO behaves as though he is a promoter!
Minority: Independent directors are, typically, retired bureaucrats or professional managers. Majority shareholders work incredibly hard to get amenable independent directors. It is true sometimes that an independent director so greatly values the prestige and board fees that the director feels obliged to support the promoter and the management—authority bias as referred to in the S&B article.
Institutional: Institutional directors may be nominated by domestic or foreign financial institutions. Domestic nominees play a passive role of watching and stay uninvolved unless a crisis arises. Foreign nominee directors are, however, professional investors, trained in valuation and governance systems. They hold managements to a tight performance standard and assert themselves. Many feel that if there is one thing that institutional directors do well, it is to ask tough questions, as, for example, in the Zee Entertainment or Dish imbroglio.
It is into this melee that the regulators are pitched, not one but multiple regulators. Who regulates banks — the Companies Act, the Securities and Exchange Board of India (Sebi) or the Reserve Bank of India? And insurance companies — the insurance regulatory authority, Sebi or the Companies Act? Like Indian gods, multiple regulators intervene with simultaneous jurisdiction, thus keeping the judicial system busy. The judges of the higher courts are so overburdened with tax, corporate and political disputes that they have inadequate bandwidth to deal with important civic and criminal matters.
God had proposed His strategy centuries ago — Sambhavami Yuge Yuge. He appears in various avatars to neutralise the wrong-doers and uphold virtue. Governance disputes will continue so long as there are self-interested promoters, money-motivated institutional investors, small shareholders, and regulators.
The key lies in training and aligning directors about the behavioural aspects of governance, not only about the laws. Companies need more neeti, less niyam.