More prattle on independent directors cannot fix governance, the chairman’s role remains terra incognita

While decision-making in most boardrooms continues to be governed by “come on, let’s be reasonable” rather than “this is the right thing to do”, the good news is that there has been a quantum jump in public discussions on improving corporate governance (CG), not to mention the predictable increase in the number of awards instituted for the same! Board evaluation and performance improvement and director search and training are emerging as high-demand, new consulting areas. Hopefully, all this focus will soon raise the bar on governance quality.

But for that to happen, the discourse needs to be broadened beyond its single-point focus today on independent directors. Discussion on how shareholder directors and executive directors can improve the levels of CG must also happen. But the biggest omission by far that needs to be fixed is around the role and responsibility of the chairman of the board in improving CG, particularly given the powers that are vested with him/her. This column lays out some issues that merit a lot more explicit discussion and clarity. The first issue is that of the job description of the chairman needs. Few disagree with the role statement that the managing director (MD) runs the business and the chairman runs the board. But this is lost in translation when it comes to the actual roles played.

The role amorphousness is compounded by the fact that very few companies have ‘outside’ independent chairmen. Most are either executive chairmen or previous MDs who know the company well, or are nominees or family members of major shareholder groups. To complicate matters, we use the title ‘chairman of the company’ and not ‘chairman of the board of company’, creating the unintended signal that is a quasi-executive role, even for a non-executive chairman. Frequently, though, the role of the non-executive chairman is explicitly articulated to include being a sounding board and mentor to the CEO.

There needs to be a lot more discussion on whether this is necessarily a good thing for CG; and if it is, then a lot more thought is needed on how to build safeguards around the way it is practiced, because the chairman and the CEO cannot be one unit. The chairman and the board are one unit and there is asymmetry in a coach counselor who also is a part-owner of the proposals that the board that he/she leads is supposed to approve. In case the chairman is also a significant shareholder, there is a bigger governance risk, and if the MD/CEO is also a formal part of the same shareholder group, then there is an even bigger governance risk. The word ‘risk’ is what will bring issue-based rationality into such discussions. It is not an indictment that this will happen; it is an increase in risk that this can happen.

Another item that needs open discussion is the pros and cons of executive chairmen: board consultants usually frame the discussion as one of choice between the two models — of executive and non-executive chairmen — that prevail around the world, based on an assessment of which model is more suitable for India. However, if framed conceptually, the question to discuss is whether there is a higher governance risk when the MD both reports to the board and is the ‘boss’ of the board, and has a significant influence as well as formal power on what gets discussed and minuted, and how, etc. Presuming the answer is ‘yes’, the discussion can then go into directions more helpful than whether the European or the US model is ‘best practice’ for India. The new discussion will be built around the idea that the choice to buy increased governance risk by having an executive chairman has to be evaluated ‘on a case-by-case basis’, and will be individual and situation-dependent. So, how best to evaluate such situations and individuals? What are the risk-mitigation factors that need to be built into board processes and structures, and perhaps even articles?

There has been little discussion in CG seminars on what the chairman’s job of ‘running the board’ involves. The last five years have seen an explosion in workloads and complexity of board business, on account of regulation, increased M&A-type activity, increases in business complexity leading to more subsidiaries, more cross-border operations, multi-country board membership, more capital raising, more shareholder activism, etc. A chairman who truly desires to run a high-performing board capable of rising to this has his work cut out for him. Add to it the work involved in building a high-values board, with diversity and space of dissent that good governance needs.

Chairmen who truly believe in good CG will know that correct board composition is about having uncomfortable, annoying diversity and strong individualism on the board: diversity of backgrounds, views and experiences, and strong individual successful track records and consciences. Putting all of them to work hard and together as a high-performing team within the framework of what a board is supposed to do, require highly-sophisticated skill and judgment and judicious use of power, especially when board or business problems arise. And with more problems arising in our business environment, we need to give the institution of chairman of the board as much, if not more, prominence in the ongoing corporate governance discussion as we are giving the independent directors.

“By all means let’s be open-minded that our brains drop out.” – Richard Dawkins, Evolutionary Biologist.