If the battle between Ratan Tata and Cyrus Mistry has revealed anything about corporate governance practices in India, it is how promoters really view the role of independent directors on the boards of the companies they control. The manner in which the Tatas criticised group firms’ independent directors such as Deepak Parekh, Nadir Godrej and Keki Dadiseth, who are among the most-respected names in the corporate world, is a case in point. Over the past couple of weeks, they were among several prominent independent directors on the boards of major Tata group companies that expressed confidence in Mr Mistry’s stewardship and voted for him to continue as chairman of those companies. But instead of respecting their stand, Tata Sons chose to question their integrity by suggesting, in the case of Indian Hotels, that Mr Mistry had ganged up with them to gain control of the company. It also accused Nusli Wadia of galvanising independent directors of a few other firms.
These accusations may well have stood had they been backed by hard evidence. In the absence of any, it is possible to conclude that Mr Tata is succumbing to the temptation of a personality cult that is endemic to large Indian promoter groups. It is worth noting that several independent directors against whom the Tatas have hurled accusations of collusion were appointed to these companies during Mr Tata’s tenure as group chairman. It is remarkable that the same stalwarts, who were trusted to discharge their fiduciary duties under Mr Tata, are now being accused of not doing so because they have chosen to disagree with him. The fact that Tata Sons has called for extraordinary general meetings in three companies to eject Mr Mistry and Mr Wadia — a childhood friend and a mentor during Mr Tata’s own battle to take charge of the group from powerful chairmen of major companies in the early nineties — suggests that the battle has more to do with personal agendas than genuine concern for the interests of minority shareholders.
More than anything else, the boardroom battle in this widely diversified $100-billion multinational has exposed the meagre degree of genuine independence vested in independent directors. The Companies Act does not specify the manner of their appointment, merely that they should comprise one-third of the board, their appointment (and removal) need shareholder approval and that they or close relatives should not have a commercial relationship with the company concerned. In practice, the majority shareholder ends up having a disproportionate say in their appointment, a situation that often encourages such independent directors to overlook questionable practices in the company. Nothing highlights the myth of the board-managed company better than the 2009 Satyam Computer fraud. Its board comprised some of the most prominent names in the corporate world internationally. Yet, as Satyam’s promoter B Ramalinga Raju eventually confessed in a letter to the stock exchange, the company had been indulging in fake invoicing for years, which, in turn, raised questions about the role of independent directors in the audit oversight committee. A critical cog in a firm’s corporate governance framework, independent directors are expected to walk the fine line between safeguarding the interests of minority shareholders and those of the promoters. However, typically, they have toed the line of promoter-shareholders. To be sure, this is not a problem limited to India; US multinationals with significant promoter holdings face this issue too. The Tata group imbroglio is perhaps unique in that some independent directors have chosen to exercise their prerogative against one of the country’s most powerful corporate scions. How it plays out could well determine the future role of independent directors in India Inc.
