In the past weeks, the crisis at a high profile Indian conglomerate has resulted in plenty of coverage surrounding board decisions, and battles for control. Company boards are rarely in focus in media: usually it is the CEO and other senior officers that are at the forefront in discussions of company performance and objectives.
The recent coverage of Tata Sons' board tussles therefore, highlights an unfortunate truth that experts have long highlighted, but usually goes unnoticed in media - company boards are often damaged entities, the focus of infighting, allegiance battles, and tests for loyalty.
The problem with boards is borne out by broader data. They are rarely effective in what they are meant for, which is reviewing and improving company performance. Experts point out that board decisions are in fact, perfunctory and fail to shape the company's strategic direction. In one McKinsey study, when asked who was responsible for a short-term focus on company results over long-term value, 47% of senior management surveyed pointed to the board of directors.
The forgotten role of the Board
So far, in the Tata Sons drama, a series of unfortunate events have played out. Cyrus Mistry, the Tata Sons Chairman appointed in 2011, gets unceremoniously fired, but then goes on record threatening legal action against Tata Sons, and points out a 'shadow Chairman' pulling the strings in board decisions: former Chairman Ratan Tata. Recordings of a board meeting requested by Mistry go missing. Independent directors are cornered and their allegiances questioned. Efforts begin to oust Mistry from individual Tata companies.
In addition, some disturbing conflicts of interest arose. Right before the move to fire Mistry, two new directors (Ajay Piramal and Venu Srinivasan) were appointed to the Tata Sons board. Mistry's replacement O P Bhatt, the proposed new Chairman of Tata Steel, was the head of SBI when the bank had notoriously cleared a $1 billion loan in five minutes to Tata Steel, for the cost of acquiring Corus. The ties between India's biggest lender and the Tata group of companies were already incestuous - Tata Consultancy Services (TCS) has been an information technology (IT) services provider to SBI, and has implemented its Core Banking System as well its operational support.
Mistry insists that the efforts to oust him started when he tried to introduce more transparency around the role of Tata Trusts in the company, as well as clarify the role of various directors at Tata Sons and the group of companies. Tata Sons has contested this.
But across the world, the legal codes for company boards stress two major aspects: loyalty (placing the company's interests ahead of one's own) and prudence (applying proper care, skill and diligence to business decisions). In the case of Tata Sons, the absence of prudence by the board is clear from the outset: a Chairman's decisions need board ratification, and the decisions to sell failing businesses and cost-cutting are ones that needed board approval. Why then, allege these as key reasons to fire the Chairman?
The company board is meant to be an enforcer of quality governance in the company, and the entity focused on creating long term value to shareholders.What we see instead, is a devalued body that is politicized and overtly controlled by one or two influential officers of the company. This becomes a significant problem when it comes to realigning a company under a new CEO/management, or adapting to more competitive markets.
In the case of Tata Sons, the dissatisfaction against Mistry apparently rose from his willingness to cut out what he saw as flailing businesses of the company, including showcase projects such as the Nano car. Mistry's counter-accusations after he was fired have emphasized the lack of company focus on shareholder value, with the former Chairman intent on retaining his influence.
The problem of the 'independent director'
Only 14% of the 692 directors and executives McKinsey surveyed in 2014 picked a "reputation for independent thinking" as among the main criteria boards considered while appointing new directors.The way directors are appointed today tends to pack boards with generalists and loyalists, who don't have relevant industry expertise and therefore cannot comment effectively on the direction of the company, or point out obsolete businesses and ways to stay ahead of the competition. This devalues the board further, turning it into a rubber stamp for the officer it favors.
The issues of corporate governance, the influence of senior officers and board independence are of great concern in an environment where Indian companies across Pharma, IT, textiles and other sectors are drawing attention from international regulators like the FDA and US Justice Department for their business practices and corporate governance norms.
At the same time, Indian banks are struggling today with bad loans - the consequences of decades of cronyism and and lending of large amounts of money to companies based on personal relationships and influence. Perhaps the biggest, most necessary outcome from this public battle in the Tata Group is a re-examination of our corporate governance norms, to examine how to move forward with improved disclosure, due diligence and transparency. The current scenario suggests that there is much work to be done.
