Independent Directors
One rotten egg
And all bets are off.
The ultimate investee for a retail investor is a promoterless professionally managed board run company. This format of corporates dominates stock market indices around the world. These organisations are built on a three way separation of shareholders, board and management. Proprietorial organisations on the other hand have the principal shareholders as majority owners, their nominees as majority on the Board of Directors and themselves as head of management. Everything else from dependent independent directors to lady directors to governance is all for the birds and bees.
India has less than ten high market cap companies which fit this criteria. These are the Tata group, L&T, HDFC, Infosys, NSE ….. we have had a couple of monumental failures – ILFS is one that comes to mind.
Many months ago I had written about systemic failure in the Tata Group. I see something similar brewing in L&T. The issue is a particular set of individuals who seem very popular in the independent director circuit. At least one of these individuals was declared to be not “fit and proper” by RBI and forced to resign as head of a bank. How that individual got onto such pedigreed boards is a matter of grave national concern. Is there a foreign hand ?? And does that extend to other companies.
There is absolutely no shortage of highly credible independent directors. Then why would any large corporate choose a tainted individual. The answer lies in malafide intent of a management chief.
The process of selection of an independent director is anything but democratic. There are no public applications. Professional managers usually do not own stock. So the only option for them to extend their sphere of influence – for personal gain or otherwise – is to induct some buddy as an independent director.
And because we have no diligence, no verification and no real corporate democracy because of the absence of activist investor protection organisations – we have no ability to regulate the entry of rogue directors under the cloak of “system abiding” processes. Events that seem to pass legal tests in matters of law but not in matters of spirit. Like the case of interdependent independent directors. This was done to remove Cyrus Mistry in Tatas when all the independent directors seemed related to each other but not to the company.
The Tatas and L&T have been my favourite Indian corporates. One was my largest client. The other sponsored my education.
We have to have a framework to ensure that tainted individuals do not make it to pedigreed boards as independent directors. And if they do, an immediate scrutiny needs to be carried out as to how they managed to get there.
These companies are national assets and timely govt intervention is very welcome.