Firms need to pay up more for Professional Director

Filed under Columnists, Corporate Governance |

By Ashish K Bhattacharyya

In a recent round table discussion, a very senior professor, who is engaged in research on corporate governance for about two decades, suggested that state-owned companies should have a different corporate governance structure. They should not have board directors. The suggestion was so radical that he could not take the suggestion forward for discussion.

He argued that in case of state-owned companies, the board of directors has a very limited role because decisions are being taken by the government, which is the promoter and which holds the majority shares in the company. The board puts rubber stamp on government decisions. The government uses the company as an instrument to achieve certain social objectives (e.g. energy security). Therefore, in some situations, government’s interest, which represents public interest, comes in conflict with the interest of other shareholders, who expect managers to create wealth for them. Although the primary responsibility of the independent directors is to protect the interest of non-controlling shareholders, in those situations, they can seldom oppose the government decision. However, this should not lead to the conclusion that the board of directors has no role in a state-owned company. An effective board can provide lot of support to the CEO, particularly in the areas of internal control and risk management. The government can use the board as a think tank for generating ideas for improving the performance of the company.

Perhaps it is a myth that the board of directors provides direction to the company. Even in non-government companies, independent directors intervene in formulating strategies only when the company consistently fails to perform in the product market. In a family business, the promoter family is the single largest shareholder group. In a subsidiary of a global company, the parent company is the promoter and it is the single largest shareholder. In all these situations, generally, strategic decisions are taken by the promoter. As regards strategic decisions, the board of directors is a lame duck board. It seldom opposes the strategic decisions of the promoter. This position is well accepted. In a company that is managed by professionals (such as ITC), independent directors can play an important role in formulating strategy. But, even in those companies ideas are not generated at the board level. Ideas are generated at various levels in the company and then some of them are blown up to strategies that the company decides to pursue. This is understandable because ideas cannot be generated through a structured process, while the board process is very structured. The board is expected to audit the proposed strategy. It can effectively audit strategies only if it is a learning board.

But, unfortunately, independent directors often become subservient to the CEO and his team. One of the reasons are the wide knowledge gap between the CEO (and his team) and the independent directors. A recent (December 2010) Harvard Business Review article argues that even 200 hours per year is not adequate to understand the business and its environment, particularly if the company has global operations. It suggests that an independent director should invest at least two days in a month to contribute effectively in board meetings. They should be allowed to interact with senior executives on regular basis to understand the business and its environment. They should have the time and inclination to learn. Most independent directors do not invest adequate time, even if they have the inclination to learn. The article argues in favour of professional directors, who are having no engagement other than to serve board of directors.

The ideal profile of a professional director is a retired successful executive, professional or bureaucrat, who has the inclination to serve companies as board members. Usually, executives and bureaucrats retire at the age of 60/62 years of age, but they maintain good health and plan to work on part time jobs that they will enjoy. Usually, they are not motivated by monetary incentives. They can invest time to learn the business and its environment. But, those who were successful in their professional career may not have the motivation to join companies other than highly respected companies. Therefore, enough monetary incentive should be provided to successful professionals, executives and bureaucrats at their 50s to attract them to choose the career of professional director.

The idea of professional directors is worth pursuing.

(Ashish K Bhattacharyya is the Professor, Finance & Control, Indian Institute of Management Calcutta, D.H. Road, Joka, Kolkata – 700104. He can be reached at Email: asish.bhattacharyya@gmail.com )

(Business Standard, 7 Feb 2011)

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Posted by on Feb 7 2011. Filed under Columnists, Corporate Governance. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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