Neither
fame nor glory

Murray Steele, who teaches Strategy at Canfield University’s School
of Management, also serves on the board of several companies as a non-executive
director. Mr Steele begins his lecture to a class of aspiring independent
directors with the question, “So you want to be an independent director”? Then
he goes on to painstakingly explain that you must understand finance and
accounting, be a strong leader, have industry knowledge, understand corporate
governance, be able to sort disputes and comprehend tricky people issues. Finally,
he clarifies that the risks of doing so are unreasonably high and the rewards
trivial. Be that as it may, in recent times, there has been a flurry of
activity amongst people pursuing board appointments and companies seeking to
recruit them. One of the reasons is the Companies Act 2013, which mandates that
boards should contain independent directors.
Shalini Khullar, having recently undertaken a course designed to
train her to act as a board member, is in search of suitable appointments. Her background
is excellent and diverse. Having worked more recently in the Human Resource
function for a large investment bank and previously with a global oil company, she
has, in addition to HR, experience in the marketing function. In her mid-forties,
she is an accomplished businesswomen of the sort that makes her suitable for
publicly listed companies looking for outside talent and keen to fulfil their
statutory obligations. However, Ms Khullar may discover the reality of
board-room discussions as not entirely matching her expectations.
Boards are odd entities that set for themselves difficult
propositions. They require members to share perspectives on strategy and ensure
compliance. But these issues require either a comprehensive knowledge of the
business (that can only be gained with years of experience in the industry) or
an understanding of what compliance is expected, as per the law. Independent
directors are not qualified in either area and can at best play a supervisory
role. Even that is premised on the hope that management discloses information
that is actually important without fluffing it in meaningless drivel. This is
occasionally not the case.
I have over the past fifteen years served on several boards across a
diverse range of industries – telecommunications; financial services; energy;
engineering, professional services – but have to candidly admit that I’m not
sure I ever added much value to any. Perhaps I might have offered an opinion on
interest/exchange rate trends and the consequent impact on the structure of a
company’s debt basket; argued with internal auditors to be more reasonable in
listing observations that are either not material or contain little in the form
of risk; quarrelled as to why a certain acquisition simply did not make sense
etc. But none of these assessments were in any way unique and the companies in
question could easily have received more considered and prudent advice from specialists
and consultants. On compliance, I may only have been as effective on the audit
committees that I chaired, as the CFO would have allowed, by providing relevant
and necessary information. Notwithstanding my years of experience in actually
running a business, sitting on several boards or having previously worked for
an investment bank, it yet remains hard to identify what questions to ask.
Broadly, independent directors need to contribute to strategy
formulation; scrutinise management performance; ensure succession planning;
determine that financial controls are in place; and ensure senior management does
not reward itself with silly pay packets that create embarrassment at
shareholder meetings. These constitute a fine set of objectives, but are often awkward
for independent directors to grapple with. In India specifically, but in many
Asian countries, publicly listed companies are commonly managed by owner
families. Owner managers therefore, perhaps with some justification, determine
the appointment and removal of independent directors. Directors, on the other
hand, have no real role to play in management appointments or succession
planning. They can at best seek information on financial matters or offer an
opinion on business strategy but their advice is rarely binding. Astonishingly,
a similar plot plays out even amongst some widely held companies with no family
ownership, where managers have retained their posts for decades and refuse to
allow for change. Independent directors, some of them arguably distinguished
individuals, despite knowing better, are simply ineffective at doing anything
about it. Some new age companies may be a little different and involve
independent director participation more expansively but they are surely the
exception and rarely in complete harmony with the spirit of what independent
directors are expected to do.

Academics who have researched board effectiveness conclude that an
ideal independent director is someone with a successful business career, a strong
intellect that can grapple with complicated issues and a robust knowledge of
financial matters. Specialists too are sometimes useful, especially in larger
companies with proportionately large boards. Mid-sized companies, on the other
hand, with smaller boards require the benefit of all-rounders. The
effectiveness of boards is ultimately based both upon its composition and the
role of the chairman in ensuring that it functions as a cohesive entity. If
meetings are participative, encourage debate, invite contrary points of view
and management is prepared to share information, boards may actually turn out
to be useful rather than an annoying statutory obligation.
But the fact remains that this is frequently not the case. In the
weeks ahead, as head-hunters scramble to fulfil mandates, Ms Khullar may receive
several board invitations. She will carefully ponder over her offers and select
a couple, for they would consume as much time as he can allow. But she would be
wise to remember Mr Steele’s counsel that there is little glory in such
appointments, even littler reward, and with some draconian provisions contained
in the Companies Act 2013, a lot of risk.
This piece was first
published in the October 2014 edition of CFO Connect. Its has been reproduced
with permissions
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