Institutionalisation fails
When Boards fail the shareholders
But who is ACCOUNTABLE for appointing the BOARD
Around six years ago, I woke up to a very disturbing post. A leading bank in India held close to 50% of our liquidity. This bank had an internal systems failure which led to one of our investors seeing money disappear from his account. Rs 400 crores disappeared.
The then CEO had reached out to give a sermon on how safe and ethical the bank was. And how this was just a rogue employee. They made good the loss. But then:
In January 2019, it was found that the CEO himself was not fit and proper. And the RBI had essentially suspended the individual. Now the bank in India has been sold to bury the past.
Now that very same individual sits on the Board of Tata Trust. This is the same entity whose finance arm – Tata Finance -had a major skirmish with RBI violations. And whose Managing Director committed suicide by hanging from a fan. Tata Finance took down the legendary accounting firm – AF Ferguson with it. For the first time in it’s 100+ year history, a senior partner was sacked. The firm is now Deloitte India. Who audited ILFS.
This is the sixth governance disaster in the House of Tatas. First was the Tata Finance fiasco whose beneficiary was the group, second was the hiring of Nira Radia, third was the Chairman getting a court stay on his conversations with Nira Radhia being carried by the press, fourth was the Cyrus Mistry fiasco, fifth was the appointment of a Board where three independent directors seem fully dependent on each other. And sixth is the Trustees of the main Tata Trust.
Now there is no law which says that independent directors cannot be related to each other or have fiduciary dealings with each other. So it is perfectly legal to appoint a friend, his gardener and his gardener’s brother in law as three independent directors. But is it right in spirit. It is true that brother in law is not a relative as per section 2 of the company law as there is no blood relation or marriage. But are we saying that in 500 crore+ humans, they couldn’t find two unrelated individuals.
And now they appoint someone declared as not “fit and proper” by RBI to be a Trustee of the Trust which appoints Boards. This raises a very serious question.
Who appoints independent directors ? And why ?
The reality is that the shareholders in a large board run, promoter less corporate are by and large passive. People look at the share price and feel happy or sad. I don’t know of any retail investor ever suggesting the name of an independent director. In such a case, it is the directors and promoters who appoint the other directors.
This is where the problem starts
And institutionalisation ends.
Intel is just one example of board failure
ILFS is another. We have Yes Bank.
And many more in the waiting.
The market only wants dependent independent directors
And the less independent, the higher paid.