Housewives on the boards of banking institutions could have saved the global meltdown
At a two day conference that concluded in Hyderabad this weekend it was claimed that the excesses of subprime that led to market meltdown could have been curbed had companies appointed more women on their boards. Almost 200 experts who assembled for the National Conference on Corporate Governance held in Hyderabad on 21 and 22 August and inaugurated by Mr Salman Khursheed, Minister for corporate affairs, questioned the role of independent directors.
In his keynote address to the Conference, Madhav Mehra , president of the World Council for Corporte Governance asserted that no lessons had been drawn from the collapses of ENRON and Worldcom 7 years ago. In Dec 2001 when Enron was on the verge of collapse the audit committee comprising only of independent directors and chaired by Robert Jaedicke, Dean Stanford Business School, did not challenge a single transaction because of the cozy ties with management. On 16 December, 2008, the resolution of buying promoter’s sinking property companies by Satyam was passed by a board that had majority of independent directors including Krishna Palepu, Ross Graham Walker Professor at Harvard Business School and an authority on making boards effective. For this we don’t need iconic independent directors who strike deep holes in company pockets as it is difficult to make them understand something when their remunerations depend on not understanding it. Independent directors are required to hold powerful management and the board to account. This required independence of mind and ability to offer contrarian views - a job that women could perform meritoriously in the boardroom and in a way that could disrupt the existing cosiness and groupthink.”
Mehra noted that significantly all three whistle blowers – Sharron Watkins (Enron), Cynthia Cooper (WorldCom) and Coleen Rowley (FBI) were women. It can be safely argued that more women on boards could have prevented the mayhem that caused the meltdown.
The conference organized by India’s Institute of Directors in association with the World Council for Corporate Governance unveiled following recommendations:
| 1. |
There is a need for greater awareness and understanding of the purpose of corporate governance and the true role of independent directors.
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| 2. |
The most serious threat to corporate governance is the development of the cozy nexus in the boardroom. Independent directors are being appointed from the same background and experience leading to a groupthink that militates against change.
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Corporate governance be treated as a set of core principles rather than rules which people have a tendency to evade. Following principles were enunciated: i. Disruption of group think and cozy nexus in the boardroom |
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Independent directors are required to be independent of both management and promoters. But this independence is a state of mind and induction of women in the boardroom go a long way in encouraging contrarian views so important in solving conundrums faced by the boards apart from acting as watchdogs for minority shareholders.
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Careful selection, appointment, training, development and evaluation of directors is one of the most crucial factors in the improving quality of corporate governance.
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No independent directors should be appointed without proper training on the role of directors and should be subjected to at least 2 day refresher training each year thereafter.
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Independent directors who merely spend 8 hours attending 4 statutory meetings of the board can add little value to the company. There is need to enhance the number of committees and the role of committees. Each independent director should become member of at least one committee.
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Remuneration committee needs to cover the remuneration of the entire staff above a certain salary. Similarly additional committees are required to deal with risk management, governance etc. Committees can be constituted as per the requirements of individual businesses.
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Good corporate governance does not call for more legislation but enforcement of existing ones. It will be better to coordinate all enforcement action through one agency.
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Instead of making headline grabbing statements about new rules regulators such as Securities and Exchange Board of India should concentrate on enforcement of existing rules.
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In this context both UK and USA regulators have set good examples in transforming and restructuring themselves as better instruments of enforcement after the recent financial collapse. During the last 7 months, since Mary Shapiro took over as chairman, Securities and Exchange Commission of USA has opened 575 investigations and taken 397 enforcement actions. SEBI also needs to pursue enforcement actions with the same vigor.
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| 12. |
Rebuilding trust is the key to deal with the volatility of the market. The only way to do that is by requiring full disclosure from companies. While SEBI has come out with some commendable directions in regard to disclosures, most of these are being observed more in breach than compliance. Big companies are getting away with partial disclosure to Exchanges while SEBI’s guidelines require that shareholders be given all price sensitive information and events that affect its operation and performance including fresh securities, acquisition, merger, disinvestment, restructuring and spinning of new divisions etc.
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Because of the workload involved in enforcement action, there is a need for SEBI to restructure itself to take effective action for each defaulting organization.
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In determination of shareholder values it is important not to forget that these values are often determent by sentiment rather than by the actual balance sheet. The focus of attention for independent directors should be on how they can add value to the company brand. |
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While the role of experience is recognized as valuable for independent directors, the boards should not become the club of retirees. It is more important to induct young blood and fresh thinking to allow the boards to function effectively in the complex business environment of today.
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In regard to the issue of age limit we think that companies should prescribe their own age limits. However, the minimum age should be 21.
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With the complexity of the businesses specially of listed companies it is not possible for any individual to do justice to more than 5 directorships of listed companies.
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Boards must ensure a regular process of annual evaluation of directors by their peers and any directors who absent on two occasions be made ineligible for the next year.
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| 19. |
With accelerating change in the market place director’s basic role is to secure the company against financial and non financial risk. SECURE (also stands for Social, Economic, Climate Change, Unforeseeable, Reputational and Ethical risks).
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| 20. |
It is time that the government made an example of Satyam in ensuring that culprits are successfully prosecuted if necessary through a special court. It should also initiate action against companies which divested their shares days before the confessions made by Mr Raju. This is important to bring confidence in the securities market.
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| 21. |
There needs to be paradigm change in regard to the purpose of quarterly reports. These reports can be of great benefit if companies honestly reveal how they dealt with market volatility and complexity and share both successes and failures instead of putting a gloss on earnings. Markets need to be sensitized to reward transparency and ownership of failure.
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| 22. |
The role of investor training was specially highlighted and the Ministry of Corporate Affairs was requested to make special arrangements for training of investors in an organized way to make them aware of the pitfalls of investing and reading of balance sheets and detecting fraud.
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| 23. |
The ministry of corporate affairs was commended for prompt reintroduction of the company’s bill and was asked to create a special cell charged with getting it through the parliament in the next session.
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| 24. |
In the matter of training of directors as well as investors it was crucial to keep the course content as relevant as possible. The three day masterclass for directors conducted by the Institute of Directors was particularly appreciated by participants because it catered for development of specific skill sets required by each independent directors namely questioning the board agenda , management of risk, understanding of financial statements, application of Balanced Score Card and management of change.
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| 25. |
A recurring criticism at the conference was the need to re-align the moral compass of the boardroom. The meltdown was the outcome of a defective remuneration model based largely on human greed. The financial instruments that manipulated rewards were the products of Ivy League Business School boys – the likes of Jeffrey Skilling and John Thain – both HBS class 1979 that were blindly imitated by India’s business schools. 2008 exposed the immorality of the business school model. Aluminis unashamedly and recklessly paid themselves outrageous remunerations while running their companies to the ground. As long as Business Schools rate their success not by the excellence of their education and quality of ethical values but by the size of the pay checks of their alumni and their obsession with winning remains the same, as characterized by Delves Broughton in his brutally honest account of 2 years at Harvard Business School in his book “Ahead of the Curve” to discover HBS to be “a factory of unhappy people”, companies were at risk of confusing performance and remuneration. It is time to reexamine such business school model and its value system and realign its ethical context with the psychological, aspirational and spiritual needs of the students to reinforce their inner values and beliefs rather than fuelling excessive consumerism and competition through metaphors of “winner takes all” and “success at all cost.”
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| 26. |
These recommendations made largely for over 4000 listed companies are equally beneficial for unlisted companies.
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Author : Dr Madhav Mehra
Dr Madhav Mehra is the President of World Council for Corporate Governance
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