Ashish Nasa
The real test of governance does not happen when everything is working well. On the contrary, the governance is tested when the value of asset comes under stress and the interests of different stakeholders begin to move in different directions.
Recent insolvency cases have once again brought this issue into focus. When a business or an asset faces financial stress, the interests of promoters, lenders, investors, creditors, authorities and other stakeholders may no longer be perfectly aligned. Decisions that appeared straightforward at the time a structure was created can become significantly more complex when circumstances change.
Let’s understand what changes when a company or asset enters insolvency. The same asset/ transaction is now viewed very differently by various stakeholders. The promoter/ borrower is mostly focused on revival, and on the contrary, a lender may be entirely focused on recovery/ NPA; while at the same time statutory or tax authorities may have their own claim as their only concern. Each of these interests are may be legitimate, but they may not point in the same direction or at the same level of priority. A person closely associated with one stakeholder may find it difficult to be perceived as neutral by the others. Even when everyone acts in good faith, the absence of independence can create questions around decision-making, and reduce confidence in the process. That is where a structure can begin to weaken precisely when it is needed the most.
This also highlights a very important principle: independent oversight is ineffective when stress has already emerged. The time to think about it is when the structure is first created i.e. when the asset is healthy, the transaction is still being executed and all stakeholders are broadly aligned. This is also the time when most people ignore this aspect of governance and focus more on the immediate objectives for example: a borrower is focused on receiving the finance and lender is focussed on getting the financial and credit metrics favourable. The parties end up agreeing on a structure because they believe that the underlying assumptions will continue to hold.
But every well-designed structure should also ask a more difficult question: what happens if those underlying assumptions change? What happens if the interests of different stakeholders begin to diverge? And who ensures that the underlying purpose of the structure continues to be respected when circumstances become difficult? This is where an independent trustee can play an important role.
The role of an independent trustee is not to replace the commercial decision-makers or to run the underlying business/ transaction. It is also not to become an additional layer of unnecessary control. The role, instead, is to provide an independent fiduciary framework around the assets or interests entrusted to it.
The word “independent” is important; the trustee should not be aligned to any one of them. Its responsibility is to ensure the purpose of the structure and the stakeholder interests is adhered as envisaged. At the same time, a trustee cannot simply be a silent observer. Good trusteeship requires attention, responsiveness, informed judgment and the ability to act within the framework of the trust or transaction. It requires both independence and engagement.
This could be one of the lessons emerging from stressed situations. Governance cannot depend entirely on personal relationships, understandings or the assumption that everyone will always remain aligned. Those arrangements may fail when circumstances are unfavourable. That is why the governance architecture matters. Clear documentation, segregation of roles, defined responsibilities, appropriate checks and independent oversight – these are not merely compliance requirements, they provide the governance resilience to a structure. They ensure that the structure does not become entirely dependent on one individual, one relationship or one set of assumptions continuing indefinitely.
An independent trustee, therefore, is not a solution that should be brought in only when a crisis emerges. Independence is most valuable when it is built into the structure at the beginning, when there is no crisis and the parties are still aligned.
A well-governed transaction does not wait for stress to discover. It needs to be built into the architecture from the very beginning.
The author is MD & CEO, Universal Trustee.
Disclaimer: The views expressed are the author’s own and do not reflect the official policy or position of Financial Express.