(This appeared in the Deccan Chronicle of 15-4-18 and 16-4-18. What is happening at Fortis or ICICI has thrown the spotlight on the “independent” directors. My view is that it is easier to believe in Santa Claus than in the ‘independence’ of independent directors)
In an earlier article, I had talked about the importance of Management Quality. When I buy a share, I become a co-owner of the business. The share price will over time, behave as the business behaves which in turn is dependent on the management. Thus, my fortunes are hitched to what the promoter-manager does. Often, the promoters/managers do things that benefit themselves exclusively and the other shareholders suffer. The suffering can be of two kinds- A reduced return which may still be good (and thus overlooked by all) or a disaster in the making where the promoter-manager takes the cake and leaves the others with crumbs.
The person/s in charge of the affairs have a fiduciary responsibility to every shareholder. Every act should have an equal impact on ALL the shareholders. When it hurts one at the cost of the other, we can say that governance has failed ant TRUST betrayed. It is truly a criminal breach of trust when the shareholder is diddled out of money by the person/s at the helm.
In today’s corporate world, CEOs are extremely well paid, with incentives linked to performance. CEO pay has to be decided upon by “independent” director. However, thus far, the ‘independent’ directors have excelled by their silence rather than speech. Not just any one company, but every company you come across.
How much can be blame the “independent” directors? In general, the independent director is chosen by the promoter. There is no way someone will pick up a person who will every speak up against the promoter. And today, the ‘independent’ directors are paid well, given a lot of free perquisites etc which are significant incentives. And by speaking up, there is a very high probability that no other company will like to have you on Board. This is common sense. So most often, the ‘independents’ keep quiet or prefer not to speak up. Unless of course they see that the risk of not speaking could make them an accomplice.
Let us understand one thing. An ‘independent’ can only know what the CEO or the promoter chooses to tell him. Other than statutory accounts, he is not privy to much. Some decisions which require a board resolution will be known. Day to day spending and/or revenues or decision making is hidden from them. So, an ‘independent’ director need not know most of what goes on. It is time we gave up the ghost that ‘independent’ directors are guarding the investors. Nothing can be farthest from the reality on the ground.
However, there are situations when these honourable gentlemen have a role to play. Let us take the case of Fortis Healthcare Ltd. Here is a company, with the promoter having lost all his stake by pledging and no clear owner visible. Add to that some dents to reputation that this industry will give to every player. In such a situation, they are the guardians. They should guide and advice the shareholders about various options available. Instead, they just acceded to the first offer for acquisition that came about. They should have found out what are other options and advised what is best for the shareholders. Their role should not extend to decision making. The decision making should be by the shareholders. The independent directors cannot do what they have done in this case. In case of M&A or other offers, they should firstly find out what other offers are possible. They should have engaged an investment banker to get counter offers. Once that was done, they should have evaluated the offer, negotiated the best terms and then put it to the shareholders for approval, with their recommendations and reasons.
What is disturbing is the goings on in the so called ‘professionally managed’ banks that are neither PSUs nor privately owned. Here, the professional management and the board have a duty to be beyond reproach. Banking is a business of Trust. If there is any deal involving a ‘related’ person, it should NOT be done at all, rather than depend on the lame excuse that there was ‘full disclosure’ and there was ‘no conflict of interest’. The independent directors have clearly let down the shareholders by keeping quiet about it. As is said, “Caesar’s wife must be above suspicion”.
Regulations or rules cannot bring about corporate governance. If there are harsh punishments on independent directors, surely no one would want to be in that position. Maybe it is best to do away with the concept of ‘independent’ directors. That way, there will be no illusion of governance. Even with independent directors, capital allocation decisions are always the prerogative of the promoter director and the independent director can only nod. Often, capital allocation decisions are a fait accompli by the time it reaches the Board rooms. So let us be on our guard. It pays to be skeptical. You cannot be disappointed.
Some additional thoughts;
Any independent director, at best, can help preserve a modicum of governance. He cannot be expected to know the business and is dependent on what the CEO/promoter tells him. However, in cases like Fortis, they should have played a better role than they did.