In her letter to the VIP Industries board a few days back, Nisaba Godrej cited differing views on leadership accountability and succession planning as the reason for her decision to resign as an independent director (ID) of the company. A day after VIP disclosed her letter to the stock exchanges, VIP chairman Dilip Piramal said Godrej felt the board needed to have a better control on its operations and undertake drastic changes including in the management, in contrast to his stance of a plan which may seem slow but focused on getting the brand in a good space. India Inc and its IDs should take lessons from the dignified way both Godrej and Piramal explained their positions. Two lessons, actually: One, IDs don’t need to walk into the sunset quietly; and two, the management doesn’t have to treat such resignations as some kind of a sacrilege.
That’s the way corporate governance should be practised. In recent times, IDs of two other prominent companies — Zee Entertainment Enterprises and PTC Financial Services — gave something other than personal reasons for their exits. While two IDs in Zee had listed out seven reasons for their resignations, most of which pertain to related-party transactions, two IDs of PTC cited governance lapses. There is no doubt that regulatory diktat also played a big role in the detailed reasons given by Godrej and the IDs of Zee and PTC for resigning. According to the directives issued by the Securities and Exchange Board of India in February this year, IDs citing “personal reasons” for their resignations will be required to explain the logic behind staying on the boards of other companies.
This proposed change is part of new corporate governance norms being finalised by the regulator for listed companies, which will come into force beginning October this year. It’s a much-needed move as too many IDs still leave companies without giving any reasons for doing so, leaving shareholders in the dark about what actually led to such departures. Data support this: So far this year, only four out of 180 IDs who resigned citing personal reasons have mentioned issues such as corporate governance or lack of transparency for doing so. Hopefully, the trend would reverse from October to remove the perception about a cosy nexus between promoters and IDs. In any case, shareholders, who appoint IDs and trust them, have every right to know what may have transpired when IDs resigned mid-way.
There are many reasons for directors disguising their true motives for resigning, such as not wanting to damage business relationships and potentially future employment opportunities, or to suffer material consequences from adverse market reaction if they own stock options. But IDs, who are supposed to bring an unbiased view and a commitment to ethical standards, just can’t be allowed to ignore accountability. The point, however, is regulations can only do so much. Promoters have an equal stake in ensuring that IDs are not merely passive participants in boardroom discussions but active contributors whose voices are valued and heard. This necessitates a culture where IDs feel empowered as custodians of corporate integrity and articulate their expectations regarding governance, transparency, and ethical conduct. Otherwise, Warren Buffet would continue to be proven right. In one of his letters to shareholders, the famed investor had written, “When seeking independent directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home.”