Article (January-2019)

Articles

Boards should instill strong sense of value system in their directors

Dr. Harish Krishnaswamy

Designation : -   COO

Organization : -  Tata Trusts, Mumbai

01-Jan-2019

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When it was to deliberate upon corporate governance and board diversity, for Saagarika Ghoshal, the choice was apparent and most appropriate - Mr. Harish Krishnaswamy, COO of Tata Trusts. He spoke at length on various dimensions of this issue. Here are the excerpts from the interview :
SG :  Corporate governance is interpreted in many different ways. What according to you are the indicators of good corporate governance?
HK Until the recent past, our conceptions about the indicators of good corporate governance has been in the direction of the set of legislations, norms, regulations, guidelines of some of the laws and acts to be practiced and complied diligently by the companies. And that comes from the fact that we have been following the western trails, given that India has adopted the Anglo-Saxon model. It took many bodies and apex organizations like the OECD, World Bank, CII, SEBI, the Companies Act and many other acts & varied committees like Narayana Murthy Committee, Naresh Chandra, Irani Committee, etc., to elucidate that the indicators of good corporate governance is not merely categorically following board processes and procedures as outlined under set of laws and acts, but involves unique set of relationships between a firm's management, board, shareholders and all its other stakeholders. Due to cultural differences, the term corporate governance and its content and shape may vary from country to country. While different countries may define corporate monitoring differently, the corporation is held accountable for corporate management and performance and the mechanism by which business is organized, directed and controlled. Going by that, every company should by itself be able to select its key corporate governance indicators on the basis of their significance and from the point of their strategy. These performance indicators should facilitate the companies to prove the progress towards sustainability objectives and to guarantee their environmental, social and economic impact coverage.
SG :  With your several years of experience, how do you evaluate the functioning and competence of Indian boards & its directors in present business scenario?
HK This year marks two decades after perhaps the earliest corporate governance initiative in India was launched by the CII in the form of a voluntary code of corporate governance, to guide Indian companies. The guideline touched various aspects including board structure, independent directors, number thresholds, attendance, establishing audit committees, etc. Although this code was meant to be voluntary and guidepost, it had ushered in focus on corporate governance in India. From then, there have been a number of committees and also changes in regulations. Clause 49 of the Equity Listing Agreement was adopted by SEBI in 1999 and mandatory governance norms came into existence on the basis of reports of various committees headed by industry leaders. Thereafter, the Ministry of Corporate Affairs, Government of India took up the domain and released the 'National Voluntary Guidelines on Social, Environmental and Economic Responsibilities of Business', followed by the enactment of the companies Act 2013 that aimed to improve corporate governance standards to simplify regulations and enhance the interests of minority shareholders. In fact, the amendments made by SEBI to Clauses 35B and 49 of the Equity Listing Agreement issued in April 2014 emphasized on "Monitoring and reviewing Board Evaluation framework" as a key function of the board. The last two decades have, therefore, witnessed a paradigm shift in the Indian corporate governance landscape, with the mandates and norms becoming considerably more stringent over the years. The role of the board of directors has also been undergoing a transformation over such time.
Recently, crises erupted in companies such as Satyam, Fortis, Infosys, ICICI Bank and IL&FS; just to name a few, wherein the role of the board of directors was again examined. From serious incidents of alleged fraud and mismanagement to underperformance, conflicts of interest and culture clashes - Indian companies displayed every flaw that they could. Does it mean that the Indian governance norms have been an abject failure? Not at all! It only means that Indian boards are yet to realize the spirit of such governance norms. Unfortunately, as a class, we Indians do not strongly believe in good conduct, although the underlying ethos of our society is righteous conduct. Our good conduct in most cases is merely an outcome of the force of law, rather than a voluntary act. The norms and law can instill only fear not character.
In all the above cases where governance has failed, the entire board and not merely its independent directors displayed a lack of courage in speaking up, probably fearing a fate similar to whistle-blowers. Due to the fear of losing directorships and other opportunities, most directors voluntarily muzzled their own voice. In many cases when the situation bottled up, they chose to resign citing 'other personal reasons'. Satyam is a classic example where the board failed. Even after the Satyam era, Kingfisher, United Spirits and Fortis are test cases of failures of directors including independent directors on aspects ranging from diversion of funds, related-party transactions to complete failure of governance in these companies.
Therefore, a time has come not to examine the competence of Indian boards but the very character of Indian boards. Individual Governance should be given more focus than corporate governance. Far more than their western counterparts, Indian boards can afford to take a long-term, internally focused view. They should strive to create a sense of social mission that is served when the business succeeds.
SG :  There is so much in the name of gender and why gender diversity on boards matters? Is it limited to compliance mind set or beyond that in India?
HK According to the PRIME database in January 2018, nearly 97% of the listed companies in India met the mandate of having one woman director on board. Only 56 Companies did not even have one woman director in their board. From the gender diversity point of view, the data looks good. However, if we deep dive into the numbers, the board demography would throw up a disappointing picture : (a) women constitute only 15% of the total directors and (b) less than 3% of total chairpersons are women. All of this is after the Companies Act 2013 and the subsequent guidelines issued by SEBI making it mandatory for all listed companies to have at least one woman on their board (either as an executive or a non-executive director) before 01 April 2015. Strengthened by the Kodak Committee report, SEBI is now again batting for at least one independent woman director on the board. The winds of change will soon need to be felt. The inclusion of women directors on Indian boards has not yet realized its full potential value.
Gender is one of the most dominant variables that influence human development from conception to death, particularly in the Indian context. Ancient Indian texts respected women and treated them as goddesses. Even today, though Indian society is patriarchal in nature, a mother enjoys similar or, very often, higher status than a father! Whether the companies are following a compliance checkbox approach or not would become very clear when we study India's approach to women's equality at workplace. By the World Bank Report, India ranks 120 among 131 countries in female labour force participation rates. India's low female workforce participation rate is at 24% and this according to the 2018 Economic Survey, is amongst the worst in South Asia. The latest round of the National family health survey (NFHS) conducted in 2015-16 shows that the proportion of working women has witnessed a sharp decline compared to a decade ago.
It is therefore, essential for the companies to do away with the traditional Indian mind-set of treating women as 'token decoration'. The ancient truth that- it is not good for man to remain alone, holds good in boards too. Women and men board members may approach governance issues differently and such varied perspectives get accentuated again, with diverse backgrounds, experiences and perspectives all that are required for the complex issues, which the companies are facing. Such diversity will bring in better decisions, thereby enhancing the positive changes to a board room environment and culture.
SG :  Do you think that "diversity" and "inclusivity" in boards can help making governance more transparent and responsible to stakeholders?
HK Contemporary digital organizations demand a network of teams, thrives on empowerment, open dialogues and inclusive working styles. Boards should now see diversity and inclusion as comprehensive strategies woven into every aspect of the talent life-cycle to enhance employee engagement, improve brand and drive performance. Diversity and inclusion now impacts brand, corporate purpose, transparency, accountability and performance. Not only is the public increasingly aware of this issue but employees are also expressing stronger views on diversity and inclusion. Shareholders, customers, suppliers and other stakeholders all are watching keenly. In the last few years, there have been significant steps to promote diversity at workplace such as the government increasing the maternity leave to six months, passage of the rights of persons with disabilities bill and many companies promoting LGBT rights at workplace.
With the board serving as a very public representation of the company, it is only natural and important that diversity and inclusivity begins with them. A more diverse board can offer varying viewpoints to better represent all stakeholders and spark creative decision - making. Diversity at the board level also means that directors are closer representative of the company's customer base. Corporate management can leverage the experience of a diverse group of directors for their own development and advice on key business decisions and in turn, a diverse group of directors may be more inclined to consider creative strategies proposed by the corporate management. Diversity and Inclusivity at the board level is an increasingly important branding consideration, particularly to demonstrate openness, transparency and accountability. On the contrary, lack of diversity or inclusivity can raise serious concerns that may create reputation risks. Finally, there is always the big advantage in being able to be forward-thinking at the board level, when you have diversity and inclusivity.
SG :  Being on board myself, I always feel it is necessary to accelerate gender diversity on boards. How do you react to this?
HK There are a number of wide-ranging benefits associated with gender diversity in the boardroom. Benefits can be far-reaching ranging from wider organisational effectiveness to more focused bottom improvements. The effect of gender diversity on boards extends to the public domain as it enhances the company's reputation in the society and it recognizes the company as a responsive employer. Given these benefits, it is, therefore, necessary to accelerate gender diversity.
Given that we accept gender diversity as essential, we should also recognize that it is a multi-layer effort that is required to embrace gender diversity. Only then, we can ensure that this is not merely an act of tokenism. Mandatory requirements may provide fillip to such measures, but by simply placing female family members on boards may not bring in the actual dividends of diversity. They may prove to be less effective compared with wider organisational strategies. To start with, therefore, an open organisational climate and culture that supports gender diversity is the bedrock for board room gender diversity too. A company with policies that support work life balance such as flexi-work hours, universal child care, family disability support, etc. will definitely have more demonstrable commitment to board room diversity as well. Once this is accomplished, we then need to build the pipeline. A quick way to build such pipeline would be through networks. In the present-day context, companies need to abandon traditional channels and expand their networks. Expanding networks can happen only when the criterion of a board member changes and with gender diversity therefore, we need creative diversity in what and who you are looking at as a board member. The in-going criteria have to become more expansive. The other sustainable route is to develop the next generation of women board members. It would do well, if women leaders are given position in management committees or smaller boards of subsidiaries, etc., they can develop the mind-set. This cascading of a commitment would have the trickle-down impact on the rest of the company and again, it would complete the loop - the whole culture, starting at the board level. It is really about the intentions of the leadership and management.
SG :  Woman on board has become a mandate. Does the presence of Independent woman director impact the corporate governance?
HK Before we even speak on the subject of independent women directors, I need to highlight the aspect which was considered a remarkable corporate governance reform, when it was first introduced : 'Appointment of Independent directors'. In most countries, there is more or less, a clear difference between the owners and management, with ownership being diverse and not concentrated in few hands. In India, the ownership and management are not separate, and most companies are dominated by families. It is, therefore, a real test of independence for independent directors. Now, with the recommendations of the Uday Kotak-led SEBI panel on corporate governance accepted as a mandate, independence has been extended to include gender diversity as well. This time, the corporate governance code has given the same importance to gender diversity as they have given to the structure of board independence. To specifically mention the word "independent" while mandating gender diversity will ensure that woman directors get appointed beyond the promoter - family and therefore become much more than merely ceremonial tick-box exercise. This combination is more likely to enhance board - independence and effectiveness.
Women directors send a positive signal regarding the company's ethical behaviour and with their collaborative leadership style bring in the benefits of boardroom dynamics such as increased listening, win-win problem solving and social support. Independent women directors will not shy away from controversial issues. Apart from allocating more effort to monitoring, they will pay more attention to audit and risk oversight and will examine a wider range of management and organizational performance. I strongly believe that the presence of Independent women directors on Indian boards will bring transparency, accountability and credibility. They will be trustees of good governance and play an important role in improving corporate credibility, governance standards and risk management of the company by taking unbiased decisions, in the interest of all stakeholders.
After several crisis and scandals that have surfaced, the world of business and finance should have understood by now, that the system of corporate governance itself needs a fundamental perspective shift. The corner stone of any effective corporate governance practices is always imbedded in virtues and intellectual honesty that obviously extends to beyond any mandated structural form. Indian boards would do well if they seek this perceptive which is inherent in our Indian culture. The Indian model of trusteeship which puts self - governance first before other forms of governance is more relevant today, than it was ever before. Boards should focus and instill in their directors a strong sense of value system and ethos and that in turn would ensure a strong corporate governance.
(Views of author are personal and not of Tata Trusts)