Our boards, their boards

Several unedifying examples in recent months underscore the fact that in India, founder-owners and powerful CEOs enjoy a disproportionate degree of latitude as far as corporate governance oversight is concerned. Much of this leeway is ascribed to the relative youth of our corporate culture and the evolving nature of Indian regulatory institutions. But our regulators can take heart, if that is the right sentiment. ICICI Bank, YES Bank, Fortis Healthcare and Infrastructure Leasing and Financial Service (IL&FS) appear to be in privileged company. Recent incidents in the US show that whatever the level of institutional oversight or vintage of the company, corporate boards remain the Achilles heel of corporate culture.

“They’re all drinking the same Kool-aid,” Jeff Sonnenfeld of the Yale School of Management said of Tesla's board in a TV interview. The comment was made in the context of Tesla co-founder Elon Musk's settlement with the Securities and Exchange Commission (SEC) that had him step down as chairman and pay a $20 million fine after he tweeted a fictitious “take private” plan that tanked the stock. The terms of the settlement included another $20 million fine by the company and an agreement that Mr Musk, who remains CEO, would not offer himself for chairmanship for three years.

In India, such strictures by the Securities and Exchange Board of India against a founder-owner with a reputation bordering on gurudom would have been unthinkable. In the US, however, the SEC's settlement has been criticised as weak, a little more than a light slap on the wrist, considering the SEC's original suit had barred Mr Musk from any board representation and executive roles. “Where is the punishment for fraud here?” Mr Sonnenfeld asked.

Several commentators said Tesla's troubles demanded that Mr Musk should have been made to step down sometime ago. The P&L is splashed with red ink, there have been some 50 significant departures in the past 18 months (including in the self-driving car unit), and the company has piled up $10.5 billion in debt, even as Mr Musk talks of setting up plants in China and Arizona. Then there is Mr Musk’s recent erratic behaviour — smoking weed on a live webcast and tweeting a “take private” plan when he didn't have the funds to back it, causing the shares to tank and inviting the SEC's suit. Yet the board remained inert through all this.

The same problem of clubbable corporate boards appears to have afflicted 126-year-old General Electric, which has just witnessed a boardroom coup to replace John Flannery with an “outsider” after just 13 months in charge. The ostensible charge was the slow pace of Mr Flannery’s turnaround plan for GE. Now it appears that Mr Flannery was struggling with some legacy problems of his predecessor Jeff Immelt (sound familiar?).

Mr Immelt may not have built a personality cult in the same as way as Jack Welch, his predecessor. But he was a reasonably powerful CEO in his own right, and the troubles that are being just revealed in GE’s health insurance and power divisions were evident on his watch. Why didn’t the board raise these issues then when analyst reports clearly flagged them? No one’s asked, and the implication is that Mr Flannery was too much the insider to have raised a red flag. One CNBC analyst called it the “mafia code of silence” that precluded these crises from being aired to investors.

Or consider Facebook, where serial disasters appear to hit every month — security breaches, hacking scandals, the contentious exit of the WhatsApp and Messenger founders and the social media site's role in influencing the US elections. Yet somehow, founder Mark Zuckerberg appears to be immune to these ructions. No one on the board —least of all its independent directors — appear to have challenged Mr Zuckerberg’s increasingly unreliable hegemony.

The power of corporate boards, no matter how luminous the personal credentials of each member, is invariably inversely proportionate to the charisma of the person at the top. In Tesla’s case, Mr Sonnenfeld suggested that Mr Musk be given a board position that would harness his formidable visionary talents (chief mentor perhaps?) without harming the management of the company.

This sounds great on paper but signature attempts in this direction have been less than successful — Apple, where Steve Jobs exited and returned, ditto with Jack Dorsey of Twitter, and at Infosys with N R Narayana Murthy (chief mentor for the longest time) to name a few. From Enron to Lehman Brothers to Global Trust Bank and Satyam, the lesson is the same: unless boards learn to be less enamoured by personality and more conscious of their fiduciary duties, the corporate world will be riven by crises and fraud on a regular basis.