Will independent directors get their voice back?

The recent palace coup in Tata Sons has drawn attention to the role of independent directors (IDs). Barring two directors who abstained, the rest of the board ousted the full-time chairman as they lost confidence in him suddenly. Company counsel stated that they were under no obligation to either state any reasons or allow him to defend himself or give adequate notice of their intention to do so. Of those who voted in favour, four directors were recent additions to the board, not having the vintage to do a proper study. Reportedly they were influenced by the Trustees of the Tata Trusts, the majority shareholders, led by the former chairman of Tata Sons. 

In some other boards of the Tata group, IDs turned down requests to oust the erstwhile chairman of Tata Sons, asserting their independence while in others they went along. The Tata Trusts have now moved shareholder resolutions in various companies to remove the fallen chairman from various boards and also a 30-year member of the board who stood up and opposed such moves. This was a truly shocking development in one of India's most reputed groups who took deep pride in their ethical conduct and good corporate governance standards. This exposed a long-standing secret that one director called the shots across many listed and unlisted companies, casting doubts on the independence of IDs in many companies. 

The independence of IDs is tested on several occasions: a regulatory or business crisis, succession of CXOs in the companies, and sudden change in the CEO caused by resignation, ill health or death. On most occasions companies do not face an existential crisis where the board needs to step in and the show goes on. But when such a special situation arises and IDs do not demonstrate their independence, the cause is lost. Even in the Satyam case, the IDs proved to be bystanders, neither asserting their independence nor discharging fully their fiduciary duties. In some companies, super star CEOs perpetuated themselves, extending the retirement age and putting their chosen successors in place while IDs appeared to coast along, not asserting their authority. 

This begs the question: Are IDs truly independent? The overwhelming evidence during the global financial crisis is that in most boards IDs failed to assert their independence, were oblivious to the developing crisis, failed to properly assess risks and were led by CEOs and the management. When the crisis hit them, some rose to the occasion but most failed. In India too, the situation remains the same. This has more to do with the created myth of ids as people who are fierce defenders of shareholder rights and structural issues on boards. Yes, during the last 20 years since Enron, more stringent control systems, standards, regulatory oversight and processes have been put in place. There is more audit and oversight than earlier. There is a great improvement in disclosure and transparency globally and in India too.

There is greater assertion of independence due to larger liability. But the true independence of IDs is known only during certain events and when they happen the great majority fall short, human nature is indeed frail. The asymmetry of actual power, both in theory and practice between boards and management, is clear. This failure has to do with the basic construct of IDs — a closed pool of appointees, an old boys club, lack of diversity, domination by CEOs and the management, huge complexity of operations, heightened risks, lack of capability and competence, inadequate time spent and poor compensation. Will this change in 2017? Nothing on the horizon foretells any systemic change!

(The writer is chairman, Aarin Capital Partners)