Independent directors...the reality

Updated: Nov 24 2005, 05:30am hrs
I have a nagging concern that the recommendations of the various committees on corporate governance on the roles and responsibilities of independent directors will end up being richer in content than in form. I wonder whether the recommendations are grounded in the reality of our board meetings. My concern is compounded by the thought that this mismatch between intent and reality may lead to overzealous but counter-productive questioning of management during board discussions.

The committees recommendations vary in scope and detail, but the underlying expectation is the same. Non executive directors must have the knowledge, integrity and independence to ensure financial, regulatory and legal propriety, and to support business development and strategy. The assumption is that the directors will find the time to learn about the business of the company and that management will provide them the relevant information. This assumption is supported by giving directors the authority to call for such information.

These assumptions do not reflect reality. Most non-executive directors do not have the time to get to grips with the details of a companys operations; its business strategy; its people and the organisational complexities. They are preoccupied with either a full-time responsibility elsewhere, or if they are retired, with multiple boards and consultancies. They seldom find slots in their diary to interact with the company outside the formality of boardrooms.

Equally, management is not forthcoming. The board papers contain no more than the bare bones of important proposals, which arrive but a few days before the board meeting. This may be a prudent precaution against leaks, but in consequence, non-executive directors are seldom well placed to contribute meaningfully to discussions on business strategy. There is always the risk that the line of questioning gets nitpicky and the discussions get bogged down by irrelevant detail.

The reality is that directors receive a surfeit of information on financial and legal issues, but limited data on business plans and development. They are, therefore, better able to discharge their responsibility regarding adherence to the corporate codes of conduct, than to provide strategic insight. This may be as intended, but, in a sense, it shortchanges the management.

Governance codes should suggest a separate panel on business strategy
Management should strike an informal pact with individual directors
Board meetings must be structured for comprehensive discussions on strategy
I wonder why corporate governance committees do not also address the question: What should management expect of their independent directors What must the independent director do or not do, to ensure he/she does not become a millstone around managements neck.

A core objective of corporate governance is to secure the conditions of profitable growth. This means the boards should endeavour to build a symbiotic relationship with management. In theory, thats precisely their charge. They are the custodians of the companys interests and it is through them that management acquires its powers. In reality, management does not always get the expected support, and often, their power gets chiseled away informally. Particularly so in family-owned companies with the patriarch as the non-executive chairman. Therefore, corporate governance (CG) codes should articulate the rights of management vis-a-vis the board and not simply their obligations.

I am, of course, aware that the underlying driver prompting this spate of CG reviews is the presumption that all CEOs are potential Ken Lays (Enron); Bernie Ebbers (World Com ) or Alfred Taubman (Sothebys); that all management has the rash egoism of a Nick Leeson (Barings) and/or the greedy gullibility of Martha Stewart. And that in the absence of explicit oversight, there will be a further run of corporate scandals. This is a presumption that should now be re-examined. For every miscreant CEO, there are exemplars of solid corporate and women, perhaps equally ambitious for professional or personal gain, have achieved this without breaching the confines of corporate and public law. I am not suggesting that the recommendations on the role of independent director are flawed. Far from it. I am simply pointing out that by focusing simply on the policing role of independent directors, than on their potential for providing strategic support, there is the risk that the baby of operational excellence may get polluted with the bathwater of financial and legal impropriety.

The ideal would be to have a board comprised of knowledgeable individuals; of proven integrity and independence of thought, who had the time and commitment to not only ensure compliance with financial, regulatory and corporate laws, but also to make a meaningful contribution to the business. The reality is that the latter has not been easy to secure.

Three steps may help bridge this gap between ideal and reality. One, CG codes should suggest the creation of a separate committee on business strategy ( a la the audit committee and remuneration committee). Two, management should strike an informal pact with individual independent directors. This pact should outline managements expectation from that director. This would be based on the individuals professional expertise and constraints of time. In turn management must commit to delivering timely and relevant information. And third, board meetings must be structured to ensure that strategy discussions receive a comprehensive hearing.

Independent directors responsibility to ensure financial and legal compliance must not be oversold. Not every CEO or manager is looking for a loophole to exploit. Equally their responsibility to management should not be undersold. Their professional acumen could be an important ingredient for sustained business success.

The writer is chairman of the Shell Group of Companies in India. These are his personal views