The invertebrates in boardrooms

“I remember when I was a child, being taken to the celebrated Barnum’s circus, which contained an exhibition of freaks and monstrosities, but the exhibit…which I most desired to see was the one described as ‘The Boneless Wonder.’ My parents judged that that spectacle would be too revolting and demoralising for my youthful eyes, and I have waited fifty years to see the boneless wonder sitting on the Treasury Bench.”

Like Churchill, who had his childhood wish fulfilled only in middle age when Ramsay Macdonald became Prime Minister, those of us who sit on the boards of companies, have the ill fortune to observe invertebrates without visiting the circus. Indeed, the one common and overriding criterion for the selection of a director by the person in control of a board is the absence of a spine. Like all generalisations, that statement is not fair to those few controlling shareholders who possess the self-confidence to be challenged. But a very large proportion of the “promoters”, even with over 50% shareholding, are petrified of being perceived as having lost control if they allow directors to even discuss (to challenge or to disagree would be unthinkably violent behaviour) their “suggestions”. If these controlling shareholders have been abusing their power, they have even greater reason to be afraid of a challenge. Hence the paramount consideration of noodle-spines in selecting members of the board.

Having sat, in 20 years, on the boards of more than half-a-dozen companies and observed the behaviour of many other directors during the preceding 36 years as an auditor, I have observed similarities in the conduct of such invertebrate directors and their correspondingly, confidence-challenged, “hirers”.

A very large proportion of the “promoters”, even with over 50% shareholding, are petrified of being perceived as having lost control if they allow directors to even discuss (to challenge or to disagree would be unthinkably violent behaviour) their “suggestions”.

For starters, promoters who make frequent and loud declarations of their commitment to good governance are generally those who practice it the least. They will strictly observe all the rituals of governance mandated by the law, but nothing of its spirit. Any suggestion to adopt a good practice not written into the law is met with a blank stare. Another trick of such promoters is to make a prominent individual, prominent but spaghetti-spined, the independent board chair, thus strengthening perceived high levels of governance.

Indeed, as in the case of promoters, many directors who are loudest in professions of good governance, are the meekest when seated around the board table. Several of these directors burnish their reputations by holding forth at seminars on corporate governance; for the insider it is shocking to see the chasm between the conduct they preach from the lectern and that which they practice at the board.

It is not uncommon for an individual to be a model director in an environment conducive to independent behaviour and lie supine in a promoter-dominated board. This Jekyll and Hyde behaviour further reinforces the impression of good governance when there is none. The regulators have attempted to stiffen the spine of independent directors in two principal ways – by trying to keep individuals who might find it difficult to behave independently from joining boards and by empowering independent directors in specific areas of governance.

It is not uncommon for an individual to be a model director in an environment conducive to independent behaviour and lie supine in a promoter-dominated board.

The first way is riddled with difficulties. It may be possible for regulators to define financial independence, but it is impossible to define emotional independence. The latter is where remaining on the board of a specific company or on the board of any company is vital to an individual’s self-esteem. These people believe that their status, their position in their family or their friends’ circle, depends on their continuing on the board of a specific company or companies in general. Because it takes an enormous amount of self-confidence or arrogance to consider oneself greater than the company, few individuals have the ability to suppress their emotional dependence on a company directorship.

Because the regulators have been prescriptive in defining independence it is possible for many persons who are not so to still be passed off as independent: former employees after the “cooling off” period, CEO’s of other companies controlled by the same promoter, professionals or businessmen who earn a significant income from other entities controlled by the promoter, directors of other private companies who have procured for those entities a significant investment from the promoter. All of these are beholden to the promoter but are treated as independent.

The second approach has its own weaknesses. The regulators have prescribed a number of ways in which independent directors can reach decisions uninfluenced by the controlling shareholder: committees with no controlling shareholder or with the latter in a minority, recusal of interested directors, greater transparency, mandatory discussions of certain items in the board or a committee, etc. But when the directors sitting on these are themselves unable to think independently, they become mere tools of the promoter, executing their mandate in a perfunctory or “as directed” fashion.

Sometimes promoters err and vote in a director with starch in her or him. Matters are informed to the other directors off-line and only those that must be brought to the board are included in the agenda with minimum information provided. If more is asked for by the “uncooperative” director, he is told that it will be presented at the meeting. That is then done perfunctorily and confusingly.

Sometimes promoters err and vote in a director with starch in her or him. As time passes and the director begins to demonstrate that conduct, the promoter adopts a simple strategy. Matters are informed to the other directors off-line and only those that must be brought to the board are included in the agenda with minimum information provided. If more is asked for by the “uncooperative” director, he is told that it will be presented at the meeting. That is then done perfunctorily and confusingly. Loyally, the other directors rush to nod assent, leaving the sole director floundering for more. The chairman, meanwhile, suggests that in the interests of time the details can be gathered after the meeting and moves on to the next item.

In extreme situations the unfortunate individual receives the silent treatment. She or he finds that her or his orthopedically impaired co-directors, who had promptly responded to emails or conversed between meetings have gone silent. All efforts at communication are received with frigid silence. Obviously, the promoter lies behind this.

And when the bull-in-the-china-shop’s term ends, there is relief all around and the silence suddenly is filled with words of praise for the wonderful inputs the outcast made during the five-year term. You can be sure that neither side wants a reappointment of this monster.

(Nawshir Mirza is an independent director on the boards of Thermax and Exide Industries and has served on the board of Tata companies for several years (Views are personal)