The board of directors of a listed company is primarily an oversight board. It oversees the management of the company to ensure that the interest of non-controlling shareholders is protected. It also functions as advisory board. Independent directors bring diverse knowledge and expertise in the board room and the CEO uses the knowledge pool in addressing issues being faced by the company.
The most important function of a monitoring board is to provide direction to the company. In the previous essay, in this space, I argued that it is a myth that the board of directors provides direction to the company in which the promoter (e.g. government, family and a multinational company) holds the controlling interest because the prom-oter does not want to give up the absolute power of formulating str-ategies. In a professionally mana-ged company in which no indivi-dual or group holds significant voting right, the strategies are formulated by the CEO. The board finds it difficult to propose alternative stra-tegies or to audit the strategy proposed by the CEO due to the knowledge gap between the CEO and independent directors.
Another very important function of a monitoring board is to set the ‘tone at the top’. It is expected to create the right culture within the company. I wonder whether, in practice, the board sets the ‘tone at the top’. I guess that the ‘tone at the top’ is set by the CEO (or the controlling group) and independent directors do not get the opportunity to set or change the organisation culture, particularly in a promoter-run business. For example, it is unlikely that the agenda of the board meeting includes an item on lobbying with the government or the audit committee knows the account head against which the speed money is adjusted. The board of directors is expected to ensure that the company does not expose itself to reputational risks by engaging itself in unethical behavior. But ethical issues are seldom discussed in the board. The board discusses only those issues that are placed before it by the CEO. It may be interesting to know how independent directors in the board of companies, whose name has been surfaced in the telecom scam, have reacted after knowing that their company might have been involved in unethical activities.
It might be an exaggeration that the board of directors, as an institution, has failed. But, it may not be far from truth to say that the board of directors, as an institution, has failed in its monitoring role. The reasons are quite obvious. Although, as per law, directors are appointed by shareholders, in practice, the incumbent management (CEO or the controlling shareholder group, if the CEO is a professional) appoints independent directors. Usually, an enlightened CEO desires a strong advisory board and not a strong monitoring board. It is unlikely that the incumbent management will select independent directors who can ask uncomfortable questions or who takes the task of monitoring too seriously. Therefore, the board functions as an advisory board rather than a monitoring board. If you ask the independent directors to analyse deliberations in the board meeting and define their roles, perhaps, most of them will come up with the answer that their primary role was advisory. Most independent directors are happy with their advisory role because that helps them to remain within the boundaries set by the ‘board room decorum’. Monitoring might require independent directors to break the ‘board room decorum’. Presence of individuals, who are respected for their work in other fields, does not necessarily improve the corporate governance. This has been established time and again by corporate governance failure in companies (e.g. Satayam, Enron, WorldCom) in which the board had luminaries from different fields of work as members.
There is a gap between what we (academics and other experts in corporate governance) expect from independent directors and what they can do in practice. Independent directors, in enlightened companies, improve enterprise performance by providing innovative solutions to issues that pull down the performance of the company. They, through the audit committee, strengthen audit functions and risk management systems. They usually stop decisions that directly hurt the interest of non-controlling shareholders. And perhaps, that is what shareholders expect from independent directors.