Role of Boards: Building Sustainable Competitive Edge

Several committees of the Board throw enough clues about the working of the company to discerning directors but it requires a different genre to courageously raise issues at the right time to protect the interest of the stakeholders and the creditors


Governance is a hot business topic these days. Increasing instances of scams, scandals and now growing number of cases revealed through shareholders activism also bring out the ugly face of governance relating to egregious compensation, appointment of directors, grant of ESOPs, related party transaction, change in company’s articles, etc. In the last one decade, a number of governance reforms have taken place starting with the new companies act 2013 and several policy pronouncements by SEBI. Yet the disturbing trends are on the rise.

The Book under review is based on an empirical work by three leading academics led by late Pritam Singh, who himself had worked on more than 20 Boards. The book examines the Board room functioning from the lens of organizational performance and takes a behavioural rather than legal or financial approach in studying the corporate governance and role of Directors. The authors observe that Boards are not doing enough to develop sustainable and competitive organizations and their research supports this.

The findings of research (based on both quantitative and qualitative methodology) presented in this seminal book are rather alarming and brings some uncomfortable truths about the functioning of Boards and the role of Board of directors.

Some examples:

-two third of sample senior management consider Boards as decorative, trophy boards, members with good CVs, high profile people

- Board of directors on private company boards are friends, more like old boys club

-40% of sample directors say boards are loaded with family members in private sector

-members of the Board from unrelated business and background

-Independent director’s appointments on whims and fancy of promoters

-60% of interview sample believe that IDs are ignorant about their roles

-75% Board members feel that their role is more ticking the box

These deductions emanate from solid empirical data and cannot be taken lightly. The data points out to behavioral aspects and the socio-cultural dimensions of boards functioning.

The role of Directors comes to prominence especially when scams and frauds come to limelight with some regularity as it is the Board whose duty is to protect the interest of shareholders and other stakeholders like employees and creditors. Any person with some idea of working of the Boards can vouch that is not that overnight these scams and frauds can come out from corporates such as Yes Bank, IL& FS, TMC Bank, Avanta Group, DHFL , HDIL and the like. Interestingly, some highly qualified professionals, persons who have donned big positions as CEOs of public institutions, former senior Bureaucrats have been Board members on some of these companies. Despite some well intentioned Board members, how come the promoters get away by having their way? This is the real issue and it raises some serious issues about the role of Directors!!

Several committees of the Board like audit committee, credit committee, risk management committee and nomination and remuneration committee throw enough clues about the working of the company to discerning directors but it requires a different genre to courageously raise issue at the right time to protect the interest of the stakeholders and the creditors. It is evident that it is not about competence or capability alone of the Board members but courage to speak up. It is also about the group dynamics when an individual director raising an issue about the serious violation may not get support of his other colleagues due to their affiliations with the promoters. Passivity and strategic silence on the part of most Directors is the key factor for such cases to occur. This is a serious governance failure.

Culture of collective complacency, status-quoism, personal loyalty to promoter and perhaps the need in some to protect their income (board fee and commission) contribute to rogue promoters indulging in unethical practices

The authors rightly point out that at a time when government is signaling to the corporate sector to play its role in helping the country reach sustainable development goals, there are no short cuts-Juggad( somehow or any how without know-how and the know-why)-the quick fix approach to win. By-passing processes, cutting corners and using unethical means will lead to a severe credibility crisis. India will be a loser and it will impact investments from abroad in Indian companies.

Building sustainable organization requires focus of the Board on strategic and long term issues like building a culture of innovation, leadership pipeline and succession issues but the empirical data clearly brings out that Boards give most thrust to operational matters and Boards repeat what top management of companies ought to be doing rather than doing their own job of developing strategy, innovation, managing reputation, managing risk and so on.

Overall, one gets an impression that Boards in India still have to go a long way in improving their governance practices. With a scenario like this some Boards may themselves turn out to be a great risk in the risk management matrix.

The book is bold with its research based revelations. I am deeply impressed by the depth and the breadth of issues that are covered by the authors. The book is highly recommended for Board members, senior management group, policy planners and the researchers in this area. There are a number of good observations and suggestions for the policy makers to act upon.

(The given review is attributed to Dr Anil Khandelwal and solely for BW People)


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