Independent directors are supposed to balance power and knowledge equations, but not in PSUs
The second CAG report of 2010-11 on the financial performance of central public sector enterprises (CPSEs) pointed to several lapses in following the governance guidelines of the department of public enterprises (DPE) and the Securities and Exchange Board of India.
The significant departures noticed by CAG includes inadequate representations of independent directors. In 18 companies the required number of independent directors was not there, while 29 had no independent directors at all. Again, two-thirds of the audit committee members were not independent directors in 19 companies. In 12 companies, the chairman of the audit committee was not an independent director.
The board of directors is the most significant instrument of corporate governance. The presence of independent representatives on the board, capable of challenging management decisions, is a means of protecting the interests of stakeholders, by balancing the power equation and the knowledge equation. Therefore, the higher percentage of retired bureaucrats and PSU officials as independent directors does not justify the role profile.
The DPE guidelines stipulate that government directors should not exceed one-sixth of the actual board strength and it is preferable to have only one representative on the board. In no case, they should exceed two. Companies like Indian Rare Earths, J&K Mineral Development Corporation, NHDC, North Eastern Electric Power Corporation, THDC India and Uranium Corporation of India had more than two government directors.
The presence of more government directors, representing the majority shareholder, and the absence of independent directors to protect the minority shareholders are an unjust equation. Moreover, the track record of independent directors in balancing the power equation in the board and protecting the interest of minority shareholders has been questionable. This may be due to the selection process that affects the independent spirit of the individual.
In listed PSUs where the government has a controlling interest, the ownership policy should be clearly disclosed and communicated, so that appropriate investment decisions by potential investors may be made.
In India, we have the government taking decisions in the larger public good, which are detrimental to the interests of certain shareholders. The pricing decisions by the coal and oil companies is a good example. If the government is in the business of running businesses, it should unambiguously and transparently explain its ownership policy vis-?-vis the minority shareholders. These are all related to the role of independent directors in balancing power.
In the era of sustainability, CSR and corporate citizenship, the boards are called upon to do their environmental, social and governance responsibilities, which links directly to three fundamental board functions: protecting stakeholder rights and interests; managing risk; and creating long-term business value. While protecting stakeholder rights and interests is essentially balancing the power equation, the other two functions demand balancing the knowledge equation by filling in the knowledge gap.
Government as the principal shareholder and promoter of public enterprises should be setting the bar on corporate governance standards and practices by inducting truly knowledgeable independent directors who can act as role models for others.
But the fact that 69 posts of CMDs and 300 posts of independent directors were lying vacant in the PSUs in June 2011 speaks of the state of governance in public enterprises.
The author is a management consultant and president of Vision Consulting
