Directors cut: ONGC lacks experts at top

Written by Pranav Nambiar | New Delhi | Updated: Dec 29 2013, 03:12am hrs
The governments norms for selection of directors and other senior PSU executives are increasingly proving to be lacking when pitted against the demands for professional acumen and domain knowledge in these companies.

Losing their protective veils fast in a competitive market economy, most PSUs are struggling with a human resource crunch that often stymies their performance and undermines growth. The appointment process for these firms through the Public Enterprises Selection Board and often under political, rather than professional influence is yet to mature.

Notably, the new Companies Act has redefined the role of independent directors (IDs) by giving them more powers and immunity. The Act has a provision that allows corporates to have a third of their board members as independent directors; Sebis strict implementation of its listing norm requires half of the board to have such directors. But in the absence of professionals with domain knowledge, this is creating a situation where PSU boards get filled with financial experts and generalists.

A telling example of this is the state of affairs in exploration firm ONGC, which continues to be burdened with much of Indias energy security programme, but is hamstrung by a paucity of top personnel with

experience in the hydrocarbon industry.

On December 2, the government appointed two additional directors without a background in the oil and gas industry to the board of the public sector major. This, at a time when its rank of independent directors is already swollen with accountants and bankers. None, except one of our independent directors, have a background in oil and gas and these officials are highly paid. What value will this add to us asks a senior ONGC official.

At present, ONGC has six independent directors, with only one of them D Chandrasekharam, an academic in resource engineering with experience in IIT, Mumbai having a background in geology. The remaining, which include former SBI chairman OP Bhatt, have a banking and/or capital markets, finance, and accounting background.

At a time, say ONGC officials, when the company has been troubled by ageing fields and stagnating production, neutral and well-informed strategic advice can help the company address some of these challenges. The independent directors are government nominees with ONGC having little say in the appointments, say company officials.

An official from an MNC audit firm, however, says considering ONGCs operations are of national importance, it is important to have directors with sectoral expertise. ONGC is important for the countrys energy

security. Also, tax-payers money is involved in the sector, the official says.

The flipside to the argument is that the role of an independent director is to protect the interests of minority shareholders and not to run the business operations. Legal experts say independent directors bring a balanced approach in decision making that helps protect the interests of all shareholders.

Some of its functions include reviewing annual financial statements, ensuring adequacy of internal control systems, discussing with auditors areas of fraud, irregularities, etc, and do not require expert knowledge in the oil and gas sector.

Prime Database CMD Prithvi Haldea says PSUs cannot be singled out, as private companies also have had independent directors without sectoral expertise. Sectoral expertise is beneficial, but not essential, as independent directors do not drive strategy, said Haldea.

He adds protecting the interests of minority shareholders is one of the primary tasks of independent directors and having a sectoral expertise does not necessarily mean that these officials have the skills and knowledge to perform this vital task.

A partner at a leading law firm says the main role of the independent director in a company is to improve corporate credibility and governance standards. According to him, the composition of the independent directors should ideally vary depending on the nature of the business.

Typically, you would have bankers, accountants and lawyers as independent directors, as they have a better understanding of issues related to corporate governance. But in the case of a high technical business, having more sectoral specialists is logical, he adds.

Industry observers say the new Companies Act mandating the setting up of an independent directors database to help corporates choose suitable persons to serve in that position will help allay some of the growing concerns over the suitability of independent directors.

A senior ONGC official says with a huge capex expected in the coming years, it is important to build a long-term vision for the company in utilising the resources more effectively.

ONGCs oil and gas production between the 2011 and 2013 fiscals slid from 62.1 million metric tonnes of oil equivalent (mmtoe) to 58.7 mmtoe a fall of about 6%. ONGC has spent R1,70,000 crore on capex in the XI Plan, has plans to spend R2,65,000 crore in the XII Plan and around R11,00,000 crore till 2030, as per its perspective plan. ONGC has targeted a production of 28.6 metric tonnes of oil and 27.6 billion cubic metres of gas for FY14, but Barclays expects the company to miss these targets by 11% for oil and by 9% for gas.