Published on 11th May 2018
*The author is a corporate advisor, author and Distinguished Professor of IIT Kharagpur.
An army officer once faced several yet unproven charges. General Maneckshaw reportedly advised him, “How can you now lead your men? If I were you, I would shoot myself or resign.” Such is the dilemma faced today by board independent directors.
Smoky controversies about CEOs and directors envelope important institutions. Like the wild Californian fires, public commentaries scald reputations and careers, sometimes legitimately. Amidst such corporate realities, I had a breakfast meeting with an independent director (ID). His discussion question to me was, “When an independent director disagrees, is it adequate to merely record his disagreement? Is that independent?”
Governance has two aspects: cognitive and behavioral. A competent ID needs to combine both aspects. Only then will his or her actions be seen as wise. The efficient ID must definitely be comfortable with the cognitive—like product or market domain, finance and law. The effective ID must also act with the behavioral vector of governance. This second aspect, which is cultural, is not sufficiently recognized while framing regulation. Indian governance is modelled on Anglo-Saxon practices, rather than local cultural characteristics.
An ID’s role is to protect the interest of the minority shareholder. To do so, the ID must form a distinctive view and be an advocate of the view. If an ID’s view fails to find acceptance of the ID’s within the board, it cannot be assumed that the board or management is obstinate. The ID must re-examine his or her view and also the effectiveness of its advocacy.
All IDs know the 7 D’s that appear below; they intuitively follow them. Amazingly and too frequently, IDs also fall prey to group think and fail to act per the 7 D’s.
- DESCRY: derived from the French descrire, it means ‘to discover’. The ID develops a PoV by absorbing the subject, listening deeply, by observing behavior and appreciating the context. The context is very important, especially in judging conflict of interest, related party matters, mergers and acquisitions. For example, the fit of a target acquisition may be sound, but its risk profile may be too high for a particular company’s balance sheet.
- DEBATE: The ID must demonstrate flexibility to consider alternative viewpoints. To paraphrase nuclear scientist Niels Bohr, the opposite of a truth is not always a falsehood. It may well be another truth. In one company, the management strategy was to shift product focus from B2B to B2C. One ID had firmly made up his mind before even listening to others’ views. His behavior became obstreperous.
- DEMUR: If the ID feels persuaded to accept, then he or she defers to the consensus, no issues. However if two conditions occur simultaneously—first, the ID has a lurking concern, and second, the subject has adequate materiality for the institution–then the ID must constructively demur before strongly disagreeing.
- DISAGREE: Indians demur so politely that the message is lost! In one board, an overseas investment proposal was debated at board meetings for eighteen months before being rejected. After the rejection, directors privately opined that they had consistently demurred. Others had not picked up others’ discreet act of demurring.
- DISTANCE: if the ID has advocated, and the debate has been professional and constructive, then the ID needs to consider whether the subject has sufficient materiality for the company. In some cases, no great principle is involved—it is one opinion versus another–or management may seek a bound freedom to experiment. Such proposals can be supported. However if the proposal has a material impact or a matter of principle is involved, then he or she should distance from the decision. How? In one company, an ID insisted on her view being recorded as having ‘expressed reservations’, a mild form. In another case, the ID wished his view recorded as ‘disagreement’, stronger form
- DEPART: there could be an unintended consequence of disagreeing or distancing. The ID could be seen by the management or by the promoter group as obstructive. If this circumstance develops, it is time to depart. The departure should be quiet if the disagreements and distancing are not material for the company.
- DISCLOSE: if there is a substantive disagreement, or the minority shareholders’ interests are materially affected, then the ID must—and is legally mandated—to disclose to the regulator the reasons for departing. Those reasons may find their way into the public domain, so be it.
These concepts are elementary and are born out of my experiences over thirty years of board work. However, I do wonder why they are breached in a visible way frequently. To quote what JRD Tata said (may be Gandhi-inspired), in deciding on a complex issue, think of the frail and elderly pensioner, who attended your last AGM, and consider how this proposal would impact him or her.