Bad industries lead to bad results - (30 October 2000)
After debating how to introduce good corporate governance for several years, the Confederation of Indian Industry (CII) is now set to kick off a massive search for independent outside directors. According to CII, the SEBI Code on Corporate Governance would require the corporate sector to find 3500 to 5000 independent directors in a little over a year for 1219 companies listed in the A and B1 groups of the Bombay Stock Exchange in the next year. Indian companies seem to think that finding a few thousand “independent” persons among a billion odd people is as difficult as winning a medal at the Olympics. But the problem may be entirely different.
This may be best time to kick off a more interesting concept. Sometime in September a couple of academics researching Corporate Governance at Oxford University held a discussion meeting. One of them quoted an unnamed Tata director as saying that “the entire concept of running companies through a board of directors is a throwback to the 19th century. He had called it “an absurdity that 12 venerable old men, meeting six times a year” could monitor a company, its operations and the rapid day-to-day decisions involved in running high risk global businesses. The academics like CII and SEBI preferred not to investigate such an un-orthodox viewpoint and suggest alternatives to responsible corporate management.
Combine the directors’ radical views with what others had to say at the discussion and his statement rings even truer. Ishaat Hussain, another Tata director talked of the Indian psyche -- “We Indians are very deferential; we are most unwilling to confront people”. Citing the example of a NYSE listed company on which he is a director, he said that the difference between Indian directors and foreign ones become most apparent at those board meetings. The foreigners directors were persistent with not only persistent in their questioning but also willing to push management until they were satisfied with the answers. Not the Indian directors. (Incidentally, this psyche seems peculiar to the Indian business environment; Indians who have made good overseas have no problems being blunt or aggressive).
Prof. K. R. S. Murthy, of IIM Bangalore and an independent director on various corporate boards corroborated this view. “We can do a lot of back biting, but when we meet formally, we want a harmonious and clubby atmosphere” he said. In fact, you have to go back nearly 10 years to find an example of a director who openly questioned management, which only shows mythical is the concept of independent directors in India. The last time a director confronted management was when S. S. Tinaikar challenged the Voltas management. Tinaikar, who had no problem taking on the might of the Shiv Sena Corporators when he was Municipal Commissioner of Mumbai, found himself quickly isolated on the Voltas board, even when others privately admitted that the company was going downhill. He resigned soon after and has not been invited to decorate corporate boards ever since.
The CII’s hunt for directors is rather amusing. There is no shortage of good people, the problem is that there aren’t enough to meet the specific requirements of our companies. The corporate sector wants well-educated persons of high personal integrity and a docile temperament. These are people who would offer good advice on neutral decisions, not trouble management on sticky ones and lend appropriate professional weight to management sub-committees. Usually, academics at management schools fit the bill perfectly, but they are not available by the thousands. If they get too persistent with their questions, they can always be told that the real world of business is far removed from academic theory.
Further, the recent trend of doling out fat sitting fees to directors is turning into another Catch-22. On one hand it is correctly argued that independent directors cannot be play a significant role unless they are adequately compensated. On the other hand the sitting fees of the better companies are such a substantial source of income that most directors would be loath to jeopardise it with too much independence.
Almost a year after the SEBI and CII Code has been in operation, there are few signs of directors’ independence. Corporate icons also find it difficult to question obscenely high salaries of professional managers or to cut through to the reasons for economy defying results. I would have loved to be a fly on the wall when the Gujarat Ambuja management explained to its directors why the company was acquiring ACC shares at Rs 370 when they were available in plenty at around Rs 100. Did they question the high price for a strategic acquisition, or were they told that it paying for a takeover by another name?
Clearly, nobody wants to rock a directorship by sparking off a storm on the board. D. N. Ghosh, former Chairman of State Bank of India is another individual who is utterly cynical about so-called good governance. “Governance is essentially a power game”, he says and thinks that the entire debate about good governance is akin to “wandering in a no mans land”. He admits that during his own time as director of scores of companies, he has seen boards ignore a variety of corporate “crimes” (his words).
Does this mean that relying on outside directors would never work? It could, if minority shareholders and institutional investors hold the independent directors accountable when their companies make bad decisions. Or if there are more instances of criminal action against companies where independent directors are also held liable. This may force directors to voice and record their dissent at board meetings and would at least act as a break to the rampant diversion and siphoning of funds by Indian industrialists. But in the final analysis, good governance by itself can do little to change the fortunes of bad businesses. As the Harvard Profession said far more colourfully –“crappy industries get crappy results”. Would good governance alone have prevented the profits of ACC, Telco, Gujarat Ambuja and Mahindra & Mahindra from plummeting this year? The answer is obvious, but the debate will continue.