Mirages in corporate governance

The issue of separation of powers between corporate owners and professional managements has become a hardy perennial in the Indian corporate governance discourse. This week brought two reminders. One was the appointment of Anish Shah as managing director and CEO of Mahindra & Mahindra, flagship of the sprawling automobiles to technology group, with Anand Mahindra stepping back as non-executive chairman. The second was a plaintive reminder from Ajay Tyagi, chief of the Securities and Exchange Board of India (Sebi), that only about half the top 500 listed firms had implemented its order to separate the post of chairman and MD by the April 1, 2022, deadline. “I urge the eligible listed entities to be prepared for this change in advance of the deadline,” he said on Tuesday.

This deadline is a pandemic postponement from April 1, 2020, which Sebi had stipulated as part of its acceptance of the Kotak committee report on corporate governance submitted in 2017. Sebi’s rule modified the committee’s recommendation that any listed company with 40 per cent public shareholding should separate the post of chairman and MD. The market regulator made the rule applicable to the top 500 listed companies by market capitalisation and added the proviso that the chairman of the board would be a non-executive director and could not be a relative of the MD and CEO under the definition of the Companies Act.

This is an interesting attempt to leaven promoter control of widely held corporations. The rule is modelled on the 1992 committee on corporate governance in the UK, better known as the Cadbury Committee after the chair Sir Adrian Cadbury. That report is considered the worldwide bible on corporate governance and influenced corporate governance structures in several developed economies. Mr Tyagi, no doubt well aware of the power that promoters wield in the Indian political economy, added that the rule would not weaken the position of promoters but improve corporate governance because the separation of roles “will reduce excessive concentration of authority in a single individual” and help “avoid conflict of interest”.

The first point is well taken — it was the basis of the Cadbury committee’s separation of powers doctrine — but the second point will remain an open question in the Indian context. Unpacked, the “conflict of interest” argument comes down to shareholder interest versus promoter/owner interest and/or whim. We assume from this argument that the independent MD represents the shareholders and has the power to save the company from the maverick machinations of a dominant promoter-shareholder, even if he or she operates in a non-executive capacity.

This is a remarkable notion, not least because the appointment of any MD is usually a function of the promoters’ approval, even if it is via the board. It is worth wondering, for instance, if B Muthuraman, who was vice chairman and MD of Tata Steel, could have talked Chairman Ratan Tata out of bidding for Corus Steel in 2007, though some analysts and the stockmarket — which panned the deal as soon as it was announced — knew it was a terrible decision. Indeed, in 2016, Mr Muthuraman, certainly no relation to chairman Ratan Tata within the meaning of the Companies Act, stoutly defended the decision as “well thought out” in the face of blunt criticism from the ousted Cyrus Mistry, then in the thick of his face-off with Mr Tata. Significantly, Mr Muthuraman’s predecessor J J Irani described the deal as “an aspirational mistake”.

So that raises the question of the role of the corporate board. Why is a board needed? The broad theory is that it is another layer of shareholder safeguards apart from proffering managements the benefit of their expertise. Yet a board as high powered as that of Tata Steel approved the Corus acquisition. The fact that boards, many of them staffed by industry stalwarts, have failed to exercise these fiduciary duties — from Satyam in 2008 to ICICI Bank in 2012 to IL&FS in 2018 — now explains the extra attention that is being paid to strengthening the independent director’s role. But this, too, is a chimera. Though board appointments are approved by shareholders — with new provisions being considered for explicit minority shareholder approval — the fact is that board members are associates or friends of the chairman or MD. Can they seriously be expected to act independently in the interest of an amorphous shareholder body over the tangible presence of the promoter or MD who appoints them in the first place?   

The same arguments apply to powerful professional CEOs. The decidedly opaque manner in which the ICICI Bank board addressed the question of Chanda Kochhar’s conflict of interest in approving a loan linked to her husband’s business interests is one example. IL&FS’ board, similarly, appeared notably incurious about Ravi Parthasarathy’s worst practices in infrastructure financing, as was YES Bank’s board to Rana Kapoor’s questionable deals.

Larsen & Toubro’s A M Naik is one of the few professional managers who has been able to serially fend off powerful dominating shareholders such as Dhirubhai Ambani’s Reliance and the A V Birla group. MD from 1999, and CMD from 2003, Mr Naik certainly put L&T on the map and ring-fenced it from future predators, though he himself has had some difficulty relinquishing control. Mr Naik’s exceptionalism shows that a rule is as good as the people who follow it. In any case, Sebi’s diktat will not really be tested in spirit and letter until India’s largest company by market capitalisation, Reliance Industries, conforms to it.