What Primary Role for Independent Directors ?

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Of late, a number of articles have appeared in the business press about independent directors(IDs). With modern corporate governance laws and regulations insisting on independent directors as the corner stone of better governance, a lot of discussions and debates have also been happening on the role of IDs. Everybody agrees that IDs are required for better corporate governance.But different people define  the roles differentlly – some as  strategic advisors to the management & watchdog to protect the interest of the minority shareholders,some say it is to oversee the financial and management performance, some others say it is to hire and fire  CEOs and plan for succession in the management hierarchy. While these are all elements of good corporate governance  and also part of the roles  which IDs play, they play these roles as any other members of the board, not specifically a IDs. In fact, the board has a collective responsibility for all these including the IDs. Then what is the primary role of IDs in a corporate entity? The word corporate entity is very important in this context because that is why we need corporate governance. Corporate bodies  are created as entities distinct and separate from promoters or management. Promoters, by and large, have a tendency to treat the companies as their private properties, and will find it difficult to appreciate it as a separate entity  which has an existence of its own, delineated from them. Whether it is Azim Premji  with more that 80 percent of Wipro or Mr.Sudhir Reddy   with  only 11.18% in IVRCL (Source: Annual reports of Wipro and IVRCL for 2011-12) one has  to keep this in mind. The very concept of inducting Independent Directors on to the boards of corporate entities must have been borne out of the premise(or fact) that the promoter will find it extremely difficult to  draw a line delineating his interest and the company’s interests. The recent controversy at Jindal Steel & Power, relating to the move to authorize the promoter Chairman & Managing Director “to revise, from time to time, remuneration of Whole-time Directors of the Company, by whatever designation they are called, by way of annual increments or otherwise” (Annual Report,2011-12,JSPL) is the result of such treatment of the company as an extension of the family. Had the promoters treated the company as a separate entity, different from family, such a proposal would not have arisen at all. Some of the world’s best known companies like General Electric(GE) continues to be governed well even though the promoter lineage doesn’t exist now, precisely because of this concept.

Dolphy D 'Souza in his recent article (Independent Directors: More questions than answers, BL, Mays}, 2013) says that "It is a strange irony that IDs appointed by promoters have to protect the interest of the perceived adversaries of the promoters-the minority shareholders." While in India, D' Souza's  views on the appointment part could be true, as a nomination committee, constituted  only of IDs is not mandatory according to our corporate governance regulations. But why the statement that minority shareholders are adversaries of promoters and hence IDs have to protect their interests. Why should minority shareholders' interests be different if the corporate body is well managed & governed, in the larger interests of the organization’s well being? Shareholders, whether promoters or others may have interests which are different from the firm(the entity). Minority shareholders  are usually a fleeting type who may not be interested in anything other than their returns. But they don't object to any decisions made by the majority shareholders (mostly promoters) who are usually in management in India, if they feel confident that the decisions are good for them too. But the shareholder emphasis in corporate governance is is not necessarily right or even legitimate  because the shareholders are not permanent(including the promoters, who at times decide to exit or allow the firm to be acquired by others  or merged with others primarily because it is good for them or the management and not necessarily for the entity).  This only adds to  my argument.

D' Souz also opines that “IDs argue that  they do not have voting power and should not be seen as a panacea for wrongdoings." This contention is wrong as IDs mostly matter in a board meeting where if the majority of IDs oppose a decision by the promoter directors or inside directors or management(executive as well non-executive directors who are promoter nominees) and it is quite possible that the promoters have to give adequate weightage for the opinions of the IDs,and not in an AGM where shareholding matters. Also, one may not fully agree that IDs can only resign from the boards “when his or her  efforts to correct the wrongdoings are unsuccessful ." The problems Iie in the fact that the IDs owe their positions to the promoters and with the kind of remuneration they get today, very rarely they object to the wrongdoings by the promoters.Resignation is not the answer. They should have first objected in the board room, insisted that their views be recorded in the minutes of the board meeting. If still promoters don't budge, they should be willing to express their opinion in public. Resignation will only weaken the institution IDs. Or if at all one resigns, why doesn't he explain the reason for resignation to the public at large? This is to be done in the interest of efforts towards better governance.Unless the IDs exert the power vested with them, governance will not improve. At least there has been one example where IDs  as a group put their  foot down and objected to the plans of management and a formidable majority shareholder like Government(Coal India Ltd.) because the decision by the management (with tacit blessing  by the government). Of course, at the other extreme, the IDs at Jindal Steel & Power  seem to have done nothing against a move by the promoter shareholders to authorize the CEO to fix the rumination to be paid to whole-time directors including himself, letting down the very institution of IDs. (The IDs didn't even have to protect their  'high' remunerations ' in this case: they are paid a pittance).

Off course, I do agree with D' Sousa that IDs have to rely heavily  on management for information and it will be cruel to punish them just like promoters-directors or whole-time directors on the premise of collective liability of the board. We should rather wait for many more years and let the governance processes establish with objectivity in  the  board rooms. Laws and regulations must be suitably amended or created to protect the IDs if they acted diligently in the interest of the corporate body.

Z- Category Security for Mukesh Ambani

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Recently the Government decided to provide Z-level security to Shri Mukieh Ambani based on the recommendations of Intelligence Bureau(IB) who investigated the incidence of Mr Ambani receiving a threatening letter from a terrorist group warning him of an attack on the tycoon's residence, Antilla. Lots of discussions and debates followed about the Govt's decision to take the responsibility of providing the highest security cover to him which is normally provided to VIPs of the Govt or the legislative bodies. ET columnist  Shri Sruthijth  K K  supported the Govt decision and even said that the Govt should have  borne  the cost of  the arrangement on the premise  that many others who enjoy such security cover (like politicians Subramanian Smarmy, DMK's MK Stalin or political and social activist Teesta Setalvad and many others) do not pay and that by accepting payment for its services, our Govt or the  society is ‘reducing the brave men of our para  forces into hired mercenaries’ (Why GOI Should’ve Paid for  Ambani’s  Security', Economic Times, 23 April 2013). Supreme Court criticised the Govt's decision saying that 'those who suffer from a threat perception must engage private security' (SC Slams Z-Security for Ambani, ET, 2/5/13)

And Mr. Sruthijith goes on to assert that the procedure followed by the Govt in deciding on the security cover to Mr. Ambani will be applicable to anybody who were similarly threatened. I sincerely don't know. Of course, as an ordinary  citizen  of the country, I may not receive a threat from any terrorist group, though.But while one may like to question Mr-Sruthijith's contention, there are other issues that need to be discussed and addressed:

1)Will the Govt provide such security cover to other industrialists, if they also receive such threats? Does the govt have sufficient trained personnel to cater to such demands?Other rich industrialists can also request for such cover because of the potential threats to them, now that Mukesh has received such a threat. Will Govt apply some yardsticks for providing such security covers?

2) Going by Michael Spence's signalling theory, Mr. Naveen Jindal must be more valuable than  Mr. Mukesh Ambani because Mr.Jindal earns (would you like to use the term' takes '?.) a salary of Re.73.42 crores compared to a salary of Rs.38.82 crores earned by Mr.Ambani, according to the company reports (Annual Report 2011-12,RIL).( Of course, Mr-Ambani has put a voluntary cap  on his salary at Rs. 15 crores).

While these are the questions one may have about the specific  case of Mr. Ambani, much broader issues also arise and need to be dealt with. Eventhough I may not receive a threat from any terrorist groups, I live in a county where  there are frequent communal riots and bomb blasts, threatening my life frequently. Also, the marginal rupee earned by me will be far more valuable than the value  of the marginal rupee earned by Mr.Ambani  or any other industrialists. As the sole earner in my family, any threat to my life will be detrimental not only to my immediate family but also to the society as a whole as other members of my family  may  become a burden on the society.Why don't the Govt provide cover to ordinary people to protect themselves of the anxiety about future if something happens to them unexpectedly. Every citizen of India, irrespective  of whether he is an industrialist or an ordinary wage earner, shall be provided such a security.

It is interesting to note that despite all the loose laws regarding possession of arms, the US Govt don't provide any special security to some of the world’s richest people in their  country likeBill Gates or Warren Buffet. Ironically, Mr. Sruthijith's statement that "No individual in India, irrespective  of his wealth, can make a competent effort to protect himself from a terror attack" very clearly states that the Govt should take steps to protect anybody (including Mr.Ambani) from terror attacks. Then, why he is biased  towards security provision for Ambani  and not  every citizen of the country?

Making research in management more relevant for the practice

I have been inspired by the article by Prof.C. Gopinath of Suffolk University, Boston,US that appeared in Business Line, dtd April 29,2013(“Research blues in social sciences”). The initial part deals with the much publicized mistakes in the research paper published by two well known economics professors at Harvard (Carmen Reinhart and Kenneth Rogoff) and how  a recent paper  by a new team of researchers using the same set of data could prove that the findings of the earlier paper  were questionable. In the later part,Prof. Gopinath laments about the relevance of research in social sciences in general and management in particular.

Most of the researchers try to do research to impress other researchers. Many of the researches appearing as papers or articles by some of the so-called  highly acclaimed researchers  cannot be  fully understood even by other researchers, forget about practitioners. Take for example papers appearing in some of the highly rated journals like Journal of Finance or Journal of Applied Finance or The Journal of Marketing. If any one of the practitioners  from the field of finance or marketing intends to gain anything from such journals, they must spend at least two-three years learning  research methodology. And what can be expressed  in terms of simple averages or percentages, many researchers complicate by applying advanced statistical tools. Very often, research rigour, rather than the applicability, becomes the focus of research. And, if a researcher tries to establish his point with the  help of simple mathematics or statistics, he will not be welcome to many journals or even conferences.

In many of the conferences, while papers are being presented, very rarely there is a question about the very idea or the concept which the researcher tries to put forth. Most of the thrust is given to the research methods used by the presenter even when the idea is not at all relevant. Even in conferences dealing with subjects like corporate governance(which according to me has more to do with human behaviours, leadership, integrity and ethics),  attempts  are seen  to make it more of a number game.

And, there are extremes at the other end, if I go by one of my recent experiences and  the researchers  go wrong very often in their anxiety to do research. I happened to attend a conference on corporate governance where one of the researchers was presenting her paper on the importance of internal control systems for better corporate governance. The lady used a sample comprising of undergraduate students of her college for the study. I don’t know to what extent a group of undergraduate students  understands about the importance of internal controls on corporate governance. Even most of the MBA students won’t be able to  make comments on the same.

Any research, to, me will be meaningful if it contributes to practice . Of course, researches can be conducted for creating or evolving new concepts or theories because most of the time good theories lead to good practices. Practices also must be researched to evolve new theories. Doing research shall not be an end in itself; it must be a means to some end.