Independent Directors

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