New boards and old games

Written by YRK Reddy | Updated: Jan 5 2008, 05:58am hrs
Appointing independent directors should be the least of a companys problems. There are loads of them who are fit, proper and competent. Yet, Indias central public sector undertakings (PSUs) have been clamouring for regulatory forbearance, remissions and reduction of the very norm of half the directors being independent to one-third. The main reason cited is that PSUs are victims of administrative delays that hamper their ability to meet the criteria for listed companies. PSUs have also been asking for some kind of remission in corporate governance norms, as they are already burdened with other superstructures of governance such as the CVC, CAG and parliamentary committees. Such arguments have become predictable. Instead, it is time for PSU managements and collectives to join hands and undertake a three-pronged action plan.

First, they must lobby collectively with the government to restructure the process of appointing independent directors. The current processes of ad hoc search committees, informal arrangements of ministers appointing one in three of their own choice, and delays arising from tensions between the use of objective criteria and recommendations, are indeed frustrating. All appointments of independent directors need to be de-politicised and entrusted to a permanent search committee. This committee should put in place an advance profile of the competence sets required, put out open advertisements for the positions, and use objective recruitment methods. The trend have been discouragingfrom the discernible objectivity evident in the first slew of appointments to the Navratnas during 1997-98 towards creeping politicisation in subsequent years. In their long-term interest, PSUs must resolve the standoff between those who want to exploit opportunities for appointing cronies and those who want to ensure professionalism.

Second, they must also lobby for re-engineering the governance overburden without sacrificing public policy objectives. Public assets need parliamentary accountability, anti-corruption laws and government auditing. This is well established throughout the democratic world, and India shouldnt be seen as an unthinking exception. If PSUs plead for exemptions on the grounds of a level playing field, they would indirectly be supporting the logic for disinvestment and privatisation. Instead, managements and collectives must lobby to ensure that the interface between PSUs and the CVC, CAG and Parliament undergoes reforms. Such re-engineering will reduce external intrusion while meeting public policy requirements fully. Commonwealth countries such as Canada, Australia and New Zealand have already shown how this balance can be achieved. Indias PSUs must study these closely to bring about governance reforms.

Third, PSUs have much work to do in spring cleaning their organisational structures and board compositions. Some PSUs have very large boards indeed, and nearly a dozen whole-time directors (internationally referred to as executive directors). The number of such whole-time directors has grown over the years, with all functional heads and SBU heads claiming positions on the board. It is probable that such board positions were created long before the requirements relating to independent directors came into force. This is a good time for PSUs to examine their current board compositions with specific reference to whole-time directors inducted out of a misplaced sense of equity among all functional and SBU heads. A boards composition must be determined from the viewpoint of corporate governance, and that alone.

Internally, PSUs must impress upon all that the role of a director is different from that of being a head of an important function or SBU. The latter need not be represented formally on the board with a right to vote. As happens in many companies, such functional heads may enjoy equal status to that of board directors in terms of compensation and perksand may even attend board meetings as permanent invitees.

Such restructuring may be appropriate not merely for reducing the number of whole-time directors, so as to lessen the target number of independent directors to be appointed, but as an organisational hygiene measure in itself.

If PSUs keep asking for remissions and forbearance instead of reforming, they may look like patients asking for temporary sedation to withstand pain rather than trying to get a cure for the ailment.