The bear will soon visit your garden

Independent directors must look for patterns in reports of disputes and business surprises

Readers of my last three articles in this column (September 13, August 29 and July 5) have asked for an example to illustrate my point that independent directors (IDs) can and should act on signals rather than wait for a crisis to crack open. I had suggested a 5C sequence — consideration of the signals, mutual consultation, counselling, coaching, and confronting.

Public reports of disputes and business surprises distract company managements. They also dilute the confidence of investors, lenders and the ecosystem. Recall what happened with Infosys during the unfortunate sparring of 2016-17, with Ranbaxy when Dinesh Thakur spoke up about fudged Food and Drug Administration data and with MP Birla companies when Harsh Vardhan Lodha sprang his surprise. What can and should an ID do? The developments may appear to be within the law, but what if the consequences stretch the rubber band of minority shareholder interests? The IDs must look for patterns because there always is a pattern to such events. Here is an example, not entirely hypothetical.

Imagine a listed company where there are two promoter-shareholders, A and B. The retail shareholders can be aggregated together as C; assume that A, B and C have about a third a piece. The law requires all directors to act in the company’s overall interest, but within this obligation, directors A and B will tend to act in favour of A and B respectively. The C directors are required to act with the interest of the minority shareholder in mind. This is the basis on which they must judge signals.

C directors notice growing and disturbing signals as A and B develop a difference of opinion, strong enough for them to go into litigation. The litigation does not directly involve the company board. What is the duty of the independent directors to protect minority shareholders’ interests? It could well appear that the dispute is outside the company and the IDs have little or no role. That is not true. For sure, IDs should avoid taking sides in the dispute, as they would with a neighbour couple who have unresolvable quarrels. Using common sense, I wonder whether IDs can consider a three-step action plan.

• IDs could, singly or severally, try to persuade the directors representing the disputants to step off the board while they sort out their difference through dialogue, arbitration or litigation. This may help to sequestrate the company from media reports. A and B nominated directors could return to the board after sorting out differences. C directors have no legal right to seek this action or to enforce this, but they can surely make a request. Their request may well be ignored or rejected.
   
• As a next step, IDs could write to regulatory or empowered agencies about their apprehension of a decline in share prices; since A and B directors are on the board, would their agency like to intervene? The regulator or agency may ignore or reject this request.

• As a final step, the IDs could resign from the board, singly or severally. They should not quote the lame duck excuse that they have many priorities, rather they should state their apprehension with transparency, as the law demands. A and B would surely not like it and may even feel pressured to avert such an outcome. 

Borrowing from Harvard Professor Eugene Soltes’ Why They Do It: Inside the Mind of the White-Collar Criminal, IDs who are silent might regard the situation as a business problem, but their actions can be deemed as moral failure. It appears that the IDs did not act in minority shareholders’ interests in ICICI Bank and Jet Airways. On the other hand, IDs in CG Power responded by removing the chairman. If IDs adopt an appropriate and calibrated approach, they can develop a moral response as the ominous signals develop. Think of IL&FS, Yes Bank and HDIL/PMC.

A non-corporate practice is of the government booking profits by selling its PSU shareholding to another PSU. The government reports the gain as revenue in its budget accounts. Recall LIC buying IDBI shares or BPCL shares being bought by ONGC. Such practices may be permissible, but are morally questionable.

When I used to visit Bulgaria in the 1980s, I would often hear an expression about bears. I learnt what it meant — if the bear dances in your neighbour’s garden, it will soon be dancing in yours for sure. 

The author is a corporate advisor and distinguished professor of IIT Kharagpur. He was director of Tata Sons and vice-chairman of Hindustan Unilever. Email: rgopal@themindworks.me