A tightrope walk! Ability to balance well the critical success factor for independent directors

Updated: February 12, 2019 2:56:59 PM

Power is getting overshadowed by responsibility and accountability, and risk has become a bigger word than reward in recent times. The pace of change, its impact/consequences and media scrutiny has exceeded the expectations of most people, including lawmakers and regulators.

A tightrope walk! Ability to balance well the critical success factor for independent directors

By Pankaj Arora

A few decades ago, the typical director of a company would conjure an image of a person with lots of grey hair, socially-networked men who spend their time in closed-door boardroom meetings over tea/coffee with their agendas as enigmatic as them. Life has changed significantly for and around them, and it seems like the closed door is now quite open. Anxiety is a word that now resonates more than enigma, and the presumption of grey-haired men is also undergoing a change, both in terms of gender and colour of hair. Power is getting overshadowed by responsibility and accountability, and risk has become a bigger word than reward in recent times. The pace of change, its impact/consequences and media scrutiny has exceeded the expectations of most people, including lawmakers and regulators.

The first dimension of change has been the business ecosystem itself. Volatility and disruption have become constant companions of businesses, and technology has been a significant catalyst along with changing demographics and government policies, especially in the Indian context. Businesses have become more complex, and economies have been more interrelated and interdependent, thereby disproportionately increasing variables that may cause seismic shifts. Staying ahead of the curve when the ground under your feet is always moving is no mean feat.

The second dimension of change has been the regulatory environment that has constantly been on the move, trying to push towards international standards and to keep pace with the dynamic business ecosystem. The Companies Act, 2013, and Kotak Committee amendments just by themselves have significantly altered the roles, responsibilities and liabilities of independent directors, and some recent cases have significantly altered the ‘what can go wrong’ scenario for them. The constantly changing goalposts have been a test of mental agility, even for the most seasoned professionals.

The third dimension of change has been increasing expectations of and accountability to a plethora of stakeholders. Independent directors are expected to bear a fiduciary responsibility towards all stakeholders, which is a broad spectrum, including minority shareholders, retail investors, community at large, etc. While theoretically that was always the case, what has changed is increased shareholder activism, increase in voice of institutional investors, increased PE/VC investor activity, emerging role of proxy advisers and the persistent media scrutiny.

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The impact of these change dimensions has been exponential due to the playing out of one scandal after another. A lot of ire has been directed towards independent directors, some justified, some not. It is important to recognise that independent directors are part of the cast, and there are more actors that play their part. Putting the entire onus on them, without adequate empowerment, protection and support from the ecosystem, will be counterproductive. Having strong independent directors on a board is a competitive advantage, but if they are focused only on defence and not offence—to use a sports terminology—their edge will get blunted.
Being an effective independent director has essentially become a tightrope walk and, therefore, the critical success factor is the ability to balance well. This balance is of multiple types, some of which are mentioned below:

>Balance between governance and management: A board’s primary responsibility is governance, and a typical knee-jerk reaction to scandals can be to dig deep and crossing the line into management function. Governing effectively without interfering in management matters may sound elementary, but is a fine line.

>Balance between strategic and compliance matters: An overtly compliance-focused board, which may be a reflection of liabilities playing out on the minds of directors, is underutilisation of the skills and experience of independent directors. Also, only looking at strategic matters may lead to missing out the obvious non-compliances and related consequences.

>Balance between participative and disruptive: There is no script to get this balance right. However, this is a significant balance to get right. There is a clear difference between being disruptive and speaking one’s mind. Similarly, there is a difference between being a team player and being a yes man. Constructive challenging is the key to being effective, and demonstrating independence of mind for an independent director.

>Balance between breadth and depth: The breadth of topics that enter the boardroom is extremely diverse, but the knowledge of independent directors may be deep in certain pockets. Unfortunately, the liabilities of independent directors are uniform regardless of their educational or professional background. Hence, where to use external experts and where to rely on the management is an important balance to strike. Also, how deep to go into what matter is an important judgement call.

>Balance between theory and practice: While this balance is imperative for success in all fields, more so as an independent director as practicalities of business may force sometimes to lean away from textbook approach, but too much leaning away may topple the balance.

>Balance between being prepared and being spontaneous: Being well prepared for every meeting is a hygiene factor, but being too scripted can impair spontaneity in the boardroom. With the range of topics, the moment may just pass to object, raise dissent, ask some tough questions, etc, and hence being instinctive is as important as being prepared.

Independent directors need to strike the right balance in every meeting, on every board, every time, to navigate this maze of regulations, expectations and liabilities that are akin to mines in a minefield. Every scandal teaches lessons, and those should be used to be more assured, confident and independent. This art of balancing is more complicated than the science, and while some of it comes with instinct, a lot of it comes with experience.

(The author is partner, Governance, Risk & Compliance Practice, KPMG in India)

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