To be an independent director these days is risky. It is akin to facing James Anderson in his comfort zone when the atmosphere is heavy, the ball is swinging and the pitch is a green top. Earlier, independent directors were panned for supporting the promoters in all that they did. Now they are being panned because some, at least, are standing up to be counted.
Fingers have been pointed at Nusli Wadia's timing in raising questions about governance in Tata Group companies. His criticism of decisions taken on the Nano, on the acquisition of Corus and a host of other points that he has made have been singled out as afterthoughts at best and mischievous at worst. Since these things happened many years ago, why was Mr Wadia silent all this time? If he felt so strongly about it, why did he not quit the board when his advice was not heeded?
A little reflection would show that these criticisms hardly stand up to scrutiny. The decision-making process in a board, as in all institutions that are not hierarchically ordered, is through discussion and broad consensus. It would be most unusual if eight or nine thinking people sitting together on a board to discuss a variety of issues are always in agreement about everything. Among the different views expressed, one will ultimately emerge as the board's decision, either unanimous or through a majority. If a decision is taken on the basis of the views of the majority, must the minority who thought differently invariably resign?
Do remember that most of these are business decisions and not matters of principle or morals where no compromise is possible. In the matter of an investment decision, for example, members express what they think will happen in the future. Is the investment a wise one? Will it bring good returns some three or four years down the road or is it likely to result in losses? Ultimately, it is a matter of opinion or, as some would say, who has the better crystal ball. If the majority of the members of the board think one scenario is likely to occur, surely those who think otherwise are not duty bound to quit?
Some years ago, the board of a company on which I sit was discussing whether to enter into a joint venture with another company. I firmly believed that such a step would be unwise and would only lead to disagreement and litigation between the two parties. The matter was deliberated at great length and ultimately the majority of the board decided in favour of the joint venture. Although my views remained unchanged, I felt no obligation whatsoever to resign from the board or to go public with my views. A detailed discussion by all concerned resulted in a different outcome and there the matter rested.
As a matter of fact, subsequent developments proved my fears to be entirely justified. The joint venture even today is stuck in litigation and is non-functional. The board later handsomely acknowledged that I was right in my opposition to the project, but none of those who rooted for the other viewpoint felt called upon to quit. The fact is that boards take decisions based on what members feel will happen in the future. Sometimes they are right and sometimes they are wrong. But this is inevitable in the risky business of decision-making.
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Another criticism of independent directors is that they are not supposed to act in concert or form a sub-group. True, independent directors should not form a pressure group or a trade union, but the Companies Act itself mandates that independent directors must meet at least once a year without the promoter or other directors being present and must, among other things, review the working of the board. Ultimately, a consensus will emerge in such meetings and unanimous decisions will be taken. Does this mean that independent directors are acting in concert? If one director seeks to convince other directors of his point of view, is he trying to stir up a revolt? And is it so easy to convert hard-headed men of business to one’s point of view? Directors who are swayed by the magic of the words of one of their number rather than by logic and cold facts should not have been made directors in the first place.
The truly valid criticism of independent directors is that their independence is often compromised by the method of their selection. It is usually the promoter who invites someone to become an independent director and the unspoken covenant is often complete allegiance to the promoter’s diktats. This is a fairly common phenomenon. So if reform is needed it is really in this field. Shareholders must be vigilant about appointment of directors on the board and vote against yes-men. Perhaps there can be a pool from which directors should be selected.
But most important of all, independent directors must grow out of the shadow of those who invited them to join the board. Once they are appointed they must show their independence, not by mindlessly opposing all that the promoters seek to do but by examining each case on merit, mindful of their obligation to small shareholders. And when they do that, promoters, commentators and the public at large must applaud them.
The writer was formerly secretary, shipping, in the Union government