Sucheta Dalal :Enforcing Corporate Governance In India (8 Dec 2003)
Sucheta Dalal

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Enforcing Corporate Governance In India (8 Dec 2003)  

As corporate governance regulations pile on greater responsibility on ‘independent directors’, it is time to question whether meaningful corporate governance reform could really be forced on companies. At a recent seminar, Indian Merchants Chamber president, Shailesh Haribhakti, said that on many of the boards that he serves, companies have made great strides in putting in place independent structures and better systems. He may be right, but good governance is tested only when there is dissent or a difference of opinion. Consider this latest US experience.

On November 30, Roy Edward Disney, nephew of the founder of Walt Disney & Co, resigned from the board, slamming its chairman, Michael D Eisner, for muzzling dissent on the board and other failings. On December 1, his friend and investment advisor, Stanley Gold, also submitted a blistering resignation letter that ripped Disney directors for “using corporate governance as a shield to protect Mr Eisner”. Disney, who was chairman of the Feature Animation Division and vice-chairman of the board of directors, accuses Eisner of driving “a wedge between me and those I work with” and asking his associates to report back his conversations. He accuses Eisner of trying to oust him from the board and “effectively muzzling” his voice just as he did with another director, “Andrea Van de Kamp last year”.

Saluting Eisner’s leadership in the first decade of his 19 years at Walt Disney, Roy said that he was “no longer the best person” to run the company. He believes that Walt Disney had “lost its focus, its creative energy, and its heritage” after the death of Frank Wells in 1994.

Eisner’s failings, according to Disney, include: A big drop in ratings of ABC Prime Time; a creative brain drain; ‘consistent micro-management of everyone’ leading to a ‘loss of morale’; timidity of investments in Disney’s theme park business; creating the perception among stakeholders that Disney is a rapacious company, always looking for a “quick buck”; absence of succession planning and failure to build “constructive relationships with creative partners, especially Pixar, Miramax, and the cable companies distributing our products”.

Stanley Gold’s five-page resignation blasted the Disney board for serving as a rubber stamp for management and helping stifle dissenters in order to shield Eisner “from criticism and accountability”. Disney and Gold are expected to launch a battle to oust Eisner, but the issue of interest to us is the fragility of good governance principles suggested by their letters and that too in a top US company.

What does all this mean for the good governance movement? Ralph Ward, publisher of Boardroom INSIDER, says that the Roy-Gold resignations show that “board power is still based more on personal politics than good governance”. Especially, Gold’s charge that the Disney board ‘enabled’ the misuse of governance reforms as a tool to concentrate executive power.

Ward says the resignations are a “bleak comment on how much true power boards have”. If boardroom elders like Disney and Gold weren’t able to lead a management shake-up at a sluggish company, how much muscle do boards really have, he wonders.

There are many such examples in India. But unlike the events at Walt Disney, nothing gets past the boardroom doors here. A recent example is the resignation of three Global Trust Bank (GTB) directors, including the head of its audit committee. None of them felt they owed it to GTB stakeholders to explain their exit from the board.

Instead, shareholders are forced to draw inferences from bits and pieces in the media and elsewhere. For instance, its heavily qualified audit report. Pricewa-terhouseCoopers (PWC) has pointed to the accounts being prepared on a going-concern basis, despite a substantial erosion of net worth, based on the bank’s future capital infusion plans. The auditor said that “utilisation of statutory reserves below the line after the net loss for the year” to provide for non-performing assets is not in conformity with generally accepted accounting principles, although GTB has the RBI’s permission to do so. Similarly, PWC says GTB has not provided for over Rs 311 crore of advances that have been restructured after the year-end, saying that the restructured loans were substantially secured and interest had been serviced until end March 2003. Also, it has made no provision for Rs 181 crore of assets acquired against certain debts.

Yet, GTB is not annoyed; its annual report says it will apply to the RBI for reappointing PWC as auditor. But as the December 24 annual general meeting approaches, newspaper reports say that M Bhaskara Rao & Co may replace PWC as statutory auditor. The RBI is believed to have cleared the new auditor even ahead of the AGM.

Having dipped into its statutory reserves, GTB is also seeking shareholder approval to appropriate Rs 130 crore in the share premium account to provide for bad loans. Had GTB’s three directors spoken their mind in the interest of good governance, would things be smooth sailing at the AGM? Would the regulators be so accommodating? But investors and stakeholders know very little about what is happening inside GTB, not even the identity of the shareholder who suddenly sold 25 lakh shares in a Rs 7 crore deal on the Bombay Stock Exchange last Thursday. That is because, in tough situations, Indian independent directors only resign; that too, citing illness or personal reasons as their excuse, but never a difference of opinion with management. Were they to ask tough questions and publicly disagree with management, they would soon find that nobody wants them as ‘independent’ directors anymore.

It is no wonder then that even those who conduct corporate governance training schools advise management students that as independent directors, they should not aspire to be watchdogs and should only ask their questions very politely. This approach may not improve governance standards in India, but it will enhance their chances of becoming ‘independent’ directors and collect hefty sitting fees.

-- Sucheta Dalal