Ratan Tata vs Cyrus Mistry row: Having marquee names on board doesn’t guarantee better governance

Published: December 9, 2016 6:14:05 AM

There is a possible irony in the transparency agenda. The greater the level of disclosures by conflicting parties, the more confusing or incomprehensible it risks becoming.

The present crisis appears to have had its gestation in the manner in which the transformation of leadership was managed following a change of guard at the helm in 2012. (Reuters)The present crisis appears to have had its gestation in the manner in which the transformation of leadership was managed following a change of guard at the helm in 2012. (Reuters)

There is a possible irony in the transparency agenda. The greater the level of disclosures by conflicting parties, the more confusing or incomprehensible it risks becoming. Eventually, the cure for such situations can be as uncomfortable as the ailment, in the context of the stakeholder community at large.

Two key issues have emerged from the ongoing boardroom tussle at the Tata Group—the manner in which such conflicts need to be resolved behind closed doors and the role of independent directors in change management.

A comprehensive assessment of the bane of the issues in the context of this high profile saga is not yet in the public domain and this aspect has led to contradictory conjectures, which possibly may not reflect the true value system and ethos of the group. The present crisis appears to have had its gestation in the manner in which the transformation of leadership was managed following a change of guard at the helm in 2012. While corporate India currently seems divided in terms of their support for two prominent personalities—Ratan Tata and Cyrus Mistry, inevitably their attention will turn to the aftermath and measures to avoid an excessive spiraling of such conflicts in future.

It is not uncommon to find boardroom conflicts and organisations across the globe take steps that stray from their core competencies, specifically actions relating to speculative and other high-risk ventures. Engaging in these and any other non-core activities requires specialised knowledge in order to reduce the risk of a company becoming over-leveraged or experiencing other unintended consequences. A bigger danger is associated with inadequate transparency and insufficient alignment at the boardroom level in the decision-making process and execution of such decisions.

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Thus, risk management assumes significant importance. A well-designed risk management system will allow for risks and threats to be fully understood and assessed by both the board and senior management. Amid a climate rife with a corporate blame game at the highest level, it is increasingly evident for enterprise wide risk management to receive the attention it deserves. However, unheeded warnings and unquestioned momentum often undermine risk mitigation efforts. And this is precisely where the debate takes different paths.

The principles of good governance require an independent director to not let any extraneous considerations impact his or her exercise of objective independent judgement in the interest of the company, while agreeing or disagreeing from the judgement of other members of the board. Yet, independent directors are a part of the board and it is the board, which has the power collectively and not independent directors in isolation.

Independence is a state of mind. Being a critical cog in a firm’s corporate governance framework an independent director is expected to walk the fine line between safeguarding the interests of minority shareholders and those of the promoters. I have often heard that the availability of good independent directors to meet the requirements of the board service is a challenge that companies face from time to time. It is ironic that the second most populated country is facing a challenge with numbers.

There is a perception that companies with marquee names are better governed and that there is a severe dearth of good candidates to serve as independent directors. Consequently, there is a tendency to go back to the same names repeatedly. However, having marquee names on the board does not necessarily guarantee better standards of corporate governance. It is the availability and commitment on the part of independent directors to understand the company, industry and business and be able to ask incisive questions, which is imperative. An independent director must have the ability to add value and this hinges on how the group of independent directors, as a whole, is able to channelise the energies of the board in the right direction. Independent directors cannot fall in the anxiety trap to project and prove an independent mind. The risk in this situation is that the interests of stakeholders can assume a low priority, resulting in form winning over substance. What is required is a varied group of individuals who can examine issues from diverse perspectives to add value to overall performance and facilitate value creation for stakeholders.

This issue is attracting attention primarily because there are several eminent directors who serve as independent directors. We certainly must not allow eminence attract attention over independence. Else companies run the risk of owners getting dethroned; management being replaced, control getting hijacked and a dysfunctional board.

Independent directors must essentially and inextricably, play conciliatory, mediatory and mentoring roles, albeit within the confines of the walls of the boardroom. While the absence of conflict may indicate a certain level of apathy on the board, opposition cannot be seen as the only measure of independence.

This leads to four questions in the context of the current tussle at the Tata Group. Is it healthy for the stakeholders, for a chairman to persist on the boards of companies where there is a persistently inflammatory conflict between the promoters and the chairman himself? Is it reasonable to expect an alignment between all members of the board, when some are questioning the chairman’s presence itself? Should a chairman of an operating company be chosen by virtue of being selected as the chairman of the main holding company? What is the acid test to determine if the chairman has lost the confidence of a board; and what should he do in the interest of the stakeholders once the loss of confidence is established?

It is incumbent on the board to ensure that they collectively demonstrate a fair and objective assessment in decision-making while keeping their personal egos and considerations aside and acting in the best interests of the stakeholders. This recognition coupled with a change in the balance of the board, is what would underpin a permanent change in governance practices.

The potential for corporate governance to increase the level of investor confidence implies that improving it on a holistic platform should be a priority. Improvements can always be identified vis-a-vis best practices and companies should remain on the lookout for them while they assess their own practices on an ongoing basis. Companies that vigilantly and proactively assess their vulnerabilities will go far in improving their ‘as is’ governance & risk management processes. They will pave the way for others to tread on.

Finally, is decision making at the boardroom in isolation of personal biases a holy grail or a practical necessity? Time will tell; ?but regulators, trend setters, practitioners and stakeholders will need to work ?closely together if lessons are to be learnt from the manner in which various events are unfolding at the Tata Group.

The author, Monish Chatrath is managing partner of MGC & KNAV Global Risk Advisory. Views are personal

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