The Hindu Business Line : Don't distrust the company board

THESE days, the institution of the board of directors of a company is receiving the focussed attention from all directions — corporate governance reports, regulators, self-regulating bodies and the media.

The news item "CD recording of board meetings suggested" (Business Line, September 23) reported that the Institute of Company Secretaries is now thinking of recording the proceedings of board meetings on compact discs and that a consultation paper on this is being circulated among its members and experts.

This move has several implications touching the foundations of the joint stock company concept. It is hoped that this consultation paper will elicit a wider and considered response from public and experts alike. A few aspects of this proposal are discussed here.

Crucial role

The board is the link between the shareholders and the company's management. It is on its effectiveness in business leadership that the success of the company depends. It consists not only of the chief executive designated as managing director but also of executive directors who are full-time officers of the company. There are also independent directors and, in India, the phenomenon of nominee directors.

Almost invariably, boards consist of eminent lawyers, chartered accountants, cost accountants, business school graduates and IT professionals. The pre-eminent duty cast on the board is that it is to deliberate in detail all aspects of the issues coming up before it. Each director will have his own view in the matters coming up before the board, and these need to be expressed freely and unhindered.

It is the function of the Chairman to inspire a free and frank discussion among his colleagues on the board. The chairman is expected to use "rigorous analysis to stimulate the board discussions with new, alternative insights and ideas". But the board is no debating society. It is a decision-making body.

Normally, therefore, what is recorded are the decisions on each item of the agenda. It is not as if voting takes place on each and every item that comes up before the board. There are free exchanges of views, arguments and counter-arguments. In other words, the pros and cons of the matter are discussed threadbare.

Board behaviour

Elaborate rules and guidelines may be prescribed for the composition of the board, how the directors are selected and what are the roles of the chairman and the non-executive directors. But how they actually function in practice depends on the directors themselves.

Apart from their experience, qualifications and commitment, it is what they actually contribute to the deliberations of the company, the stance they adopt on various issues that makes the crucial difference between a good company and one that falters — not only in performance but also in adherence to good corporate governance practices.

Ms Orie Dudley, CEO of Scottish Widows Investment Management writes: "You can buy talent, you can buy technology, but the key to making the business exciting and distinctive is how you pull it all together, and that is a cultural thing."

The Economist referred to typical board meeting behaviour recently while discussing corporate governance issues. It referred to the description of a company by a 19th century author Anthony Trollope in The Way We Behave: "The chairman of the Great South Central Pacific and Mexican Railway Company would never sit for more than half an hour.

Melmotte (the chairman) himself would speak a few slow words always indicative of triumph, everybody would agree to everything, somebody would sign something, and the board meeting would be over." The magazine comments that: "The cases of Enron, WorldCom, Marconi and other recent corporate debacles signify that boardroom life is still all too often as it was in the Victorian Age.

Too many boards are stuffed with yes-men who question little what the chief executive suggests".

Chris Pierce, in The Effective Director: The Essential Guide to Director and Board Development, describes the features of a poorly performing board. He writes: "... take major decisions with inadequate debate or no challenge (it is a country club board that will not take hard decisions, unpleasant but necessary decisions — the board meetings are social occasions over a good lunch with inadequate time for discussions and a rubber-stamping of decisions."

Board under scrutiny

You will find that the thrust of several reports is on the board. It is undergoing a transformation. The Economist emphasises that the "boards are the links between the mangers and the investors and so, potentially, the most effective instrument of good governance and constraint on the chief executive."

It also points out that what counts in the end is how directors behave and what questions they ask, not whether they have been elected or can explain why they do not have a finance professional on the audit committee.

In fact, the importance of the variety of opinions and views in the board room is a healthy sign. That came to the fore when the Financial Times wrote an editorial on the Derek Higgs report early this year, appropriately captioned: "Dissent is needed in the boardroom".

Record of decisions, report of proceedings

It would do a lot for the efficiency of the company functioning and lighten the work of a harassed company secretary if only decisions are recorded rather than the views on every item which each director puts forth. The current proposals go even further. It suggests the use of CD for recording verbatim proceedings.

The reason given for this suggestion is that it will prevent `tampering'. At this rate, it may not surprise us if, as a further and foolproof evidence of what is happening inside the boardrooms a suggestion is made for video-filming the board meetings!

This at once raises a host of fundamental issues. The recent spate of scandals in the corporate sector in the West has brought into focus issues of trust among board-members, and between chief executive and directors.

They are accused of fattening their pay-checks while laying off labour in thousands. And for this non-performance, the severance pay for the CEO has been found to be quite a big pot of gold. The feeling among the various sections in the Western corporate world is that trust, which is the basis of corporate success, is sadly missing.

Viewed in this background, the suggestion to video-record broad proceedings will only negate the value and trust we need to place on the board. Recourse to technological advancements to get proof of correct behaviour in the boardroom is like cutting off the nose to spite the face.

Human nature being what it is, the defensive tendency of every director may be to say little or, at the other extreme, to harangue his colleagues with a full speech on the pros and cons of a proposed move.

Beware of industrial espionage

From yet another angle, the proposal to record board proceedings will cost companies dear. Companies have now to face keen competition, both local and global.

In the Machiavellian world of modern business, industrial espionage may also mean getting hold of the compact disc containing a rival company's board proceedings. This will certainly spell danger for the company concerned.

Codes and advanced technology

There is already a substantial body of thinking in the relevant quarters that the maze of corporate guidance rules and procedures has resulted in box-ticking and little else. It has also been pointed out, though embarrassingly, that those companies that recently failed have shown scrupulous adherence to the best corporate governance provisions.

Recently, there has been talk of using such advanced IT facilities as video-conferencing, by which, some experts say, meeting for AGMs could be given the go-by.

This may have emanated from the fear of the renewed shareholder activism seen these days and with the idea of sparing the top management the agony of two-hour AGM proceedings. But such technical advancements in networking will not contribute to the company's better performance per se.

On the contrary, it could result in `a disconnect' between the company and the investors and shareholders, while it is the reverse that is needed the most.

Future of the company

Companies, both national and multinational, are the objects of criticism from various quarters. Writers like Noreena Nertz and George Monbiot have commented on the vast powers the companies have even as they admit the importance of companies in the economy of a country.

The danger to companies comes not from such critical views; in a way these views operate as a regulatory check from the academic community and are calculated to help companies grow healthily and give them an opportunity to rid themselves of unsatisfactory or unethical practices they may have been following.

In the current situation, there is more danger to the company from the suggestions such as those emanating from the company secretaries. Public trust in the board will only be eroded if CDs are used to keep a record of what members say at board meetings.

Especially, post-Enron, all over the world, companies are under critical scrutiny. It is reported that 70 per cent of Americans said that they do not trust their companies. Another aspect of the current proposal is that such a thought should have emanated at all from the professional body of company secretaries.

Indian company secretaries may be rightly concerned with how to ensure proper recording of board meetings. But if, in the process, the very trust in the board is killed, it may be counter-productive. It is hoped the proposal will be given up.

(The author is a former Executive Director, LIC.)

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