The winds of change that are blowing through Indian society are inevitably going to drive changes in corporate governance as well.
The Right To Information Act, the rise of the Aam Aadmi Party, the Lokpal Bill, the Companies Act of 2013, new governance norms from stock market regulator Sebi (Securities and Exchange Board of India)—these are all reflections of a fundamental trend towards greater transparency and accountability, and Indian companies, some of them famously opaque, cannot remain immune to these forces.
More importantly there is a clearly emerging correlation between good governance, the ability to attract capital and valuation. It seems likely, therefore, that the boards of India’s private sector companies will gradually start changing both in composition and functioning. It is possible that public sector boards will also see similar changes. Already there is a much greater importance given to the role of independent directors. The new Companies Act attempts to hold directors more accountable for board decisions. There is a call for greater gender diversity. Term and age limits will inevitably follow. One result of these changes will be the need for many more independent directors—more professionals, younger directors and, most of all, women directors. This opens up an exciting opportunity; serving on the board of a public company can be a wonderful learning experience. But it can also be fraught with frustration and, increasingly, risks. It is poor form to join a board and then quickly jump off; so thorough due diligence is essential before your make a commitment.
Here then, are five things to consider in assessing your fitness before joining a board.
What is the reputation of the firm? Are you comfortable with its ethics and business practices? Is the firm known for transparency or opacity? Is it likely that it is cooking the books? Is the CMD or CEO known to be close to politicians? If the firm is in an industry that is significantly dependent on government regulation or contracts, how does it succeed? How independent is the board or are the directors friends and cronies of the chairman? Is it utterly hierarchical and centralized or is it run reasonably professionally? Knowing the responses to these questions, how comfortable are you with being a director of the firm? Will your personal reputation be enhanced or diminished by joining this board?
What kind of a board is this really? Very generally, boards tend to function in one of three modes. The first is a “rubber stamp” board that is in the thrall of the chairman or CEO. Most directors are either friends of the chairman or else quite thrilled to simply be part of this board. There is little independence and corporate governance exists in form rather in spirit. Surprisingly, it’s not just badly run companies that have such boards; some of the world’s most successful companies operate this way.
Often when there is a super star founder/CEO and the company is performing spectacularly, it is not uncommon for the board to operate in this manner. Think about Microsoft or Apple or GE in their heyday.
A second mode is “advisory”; here the board debates issues and strategies, directors are free to express their views but at the end of the day, they have limited influence. It’s the chairman or CEO who frames the agenda, controls access to information and calls the shots. In this mode, information is presented in a tightly scripted manner and there is little engagement between board meetings.
Finally, there is the “engaged” board. This is one which truly tries to engage directors and leverage their expertise. Committees are active. The board is involved in shaping the strategy. Independent directors are encouraged to get to know senior leaders and high potential talent. Company performance is benchmarked and hotly debated. External perspectives are brought in. Now admittedly boards can and do switch between these modes; for instance during a crisis or when approaching CEO succession, boards tend to be more engaged. But generally, every board has a characteristic tendency and it’s important to understand what that is. Ask yourself, what will you likely learn? Will you be able to perform your fiduciary duties as an independent director?
Why do they really want you? Is it simply to improve the diversity of the board? Is the company frankly just looking for a trophy? Or perhaps, a compliant person? Are you likely to be lending your reputation to the company or gaining in equal measures? Is the company looking for specific skills or expertise? What and how will you be able to contribute to the company over time? What mechanisms exist to contribute your knowledge or expertise? What do the director’s fees signal about what’s valued?
How will you fit into the culture and dynamics of this board? Do you know the chairman or do you at least sense a positive chemistry with the chairman? How about with the CEO? Who are some of the others directors and do you think you would be able to work well with them? How diverse is the board in terms of age, gender and mix of experiences? Is the environment collegial, clubby or political? Are there any super egos in the room? How constructive is the relationship between the board and management? Is the chairman committed to improvement? Is there an established practice of board reviews? Do individual directors receive feedback? Over time, nothing will make a greater difference to board performance or to your sense of satisfaction as board dynamics. And even firms with stellar reputations and star studded boards like HP can have hugely dysfunctional board dynamics.
Finally, there are questions to ask the person in the mirror. What is your primary motivation for wanting to join this board? Is it learning? Prestige? Money? Networking? Do you identify with the mission of the company? How will you be able to contribute to this board? How much time will be really required and can you afford to devote this over the next few years? Will you be able to place the organization’s interests above your own when making decisions?
Now it may seem that such detailed insights into the functioning and dynamic of a board would be quite hard to discover. But it is in fact surprisingly easy especially in India where the corporate world is quite tightly knit. Much can be gleaned by asking the advice of an elder statesman. Even more can be understood by talking openly to the chairman, or to some current and past directors, to audit firm partners and company secretaries. The real challenge isn’t finding out the reality; it is in being honest about your own motivations.
When it comes to joining a board, it truly is a case of “decide in haste, repent in leisure.”