|
Corporate India has been in the limelight of late for all the wrong reasons: investment and financial calls gone wrong resulting in unpaid loans, huge debts, and to sum it up, Non-Performing Assets (NPAs). The egg on the face is not just limited to firms that borrowed funds and did not get the envisaged returns but there has been adverse attention on the Banking Sector for having funded dubious proposals without careful due diligence. While clearly some business decisions do go wrong - after all risk is inherent to every business - what has raised hackles is the suspicion of corporate malfeasance, deliberate non-feasance and misfeasance. And, need I say it, the media has gone to town with stories, some true and some spiced up for public consumption.
The underlying question in this sad episode is the role of the Board of both firms, the one who sought the loan, and the Banks who generously offered the funds. Let me begin with the loan seeker. Typically, this is a listed firm with claims of being a professional entity with an ambitious Promoter/Chief Executive who intends to build the enterprise with either rapid organic or inorganic growth, seizing the opportunities thrown up in the new liberalized economic environment. Numbers are presented to the Board, who ask hard questions, and then give the go-ahead for the investment proposal. Fundamental to such decision making is strategic reasoning, backed up by deep analysis of risk and return and, of course, trade-offs are calculated by scenario planning.
Take the other side now: the Banks who fund the investment. Again, typically, they receive the proposal, scrutinize it with a fine tooth comb, check the track record and credit-worthiness of the borrower firm, weigh it with the Bank's risk and lending policies, sense the business climate of the future, and then after umpteen due diligence exercises - including vetting the proposal through various internal credit committees - give the green signal for the transaction, not before, I must add, securing collaterals to cover a multiplicity of risks. Usually, this is an agonizing process for a borrower who blames Bankers for being ultra-cautious, nay even, anti-growth!
So much for the ideal, text-book scenario. Now, the reality. At the investing company's end, the strong-willed owner-promoter/CEO (who may well be the Executive Chairman too) has his heart on a dream project. The project is placed before the Board, as is required, and more often than not, after some discussion, the proposal is cleared. At the other end, usually the player being a Public Sector Bank, the Promoter has already met the power players of the Bank's Board, and the loan sanction is often an easy process.
While critics may argue with the above scenarios as being naive and gross over-simplification of reality, it is intriguing how Boards have allowed NPAs to rise year after year at Banks, largely in the Public Sector. And, also why Boards at investee companies too have failed to bring management level changes when shareholder value has been sharply destroyed by failed investment decisions.
The reasons are not too difficult to find: the Board has not played its true part. And, the root cause: the Board (in listed firms) has been populated by family, friends and close associates of the Promoter, and by tenured government nominated officials in the Public Sector Bank, who follow the diktats of politicians of the day. Needless to say, quality governance is an unlikely output from such Boards.
Board room battles are not unknown to other parts of the world too. Some business commentators still maintain that the mess at the storied technology firm, HP, began with the confusion at the Board when strategic calls were necessary and the Board failed to take them. Till today, HP has not fully recovered from the Board room intrigues of the early 2000s when wire taps were authorized by the Chairman of the Board on fellow Board members! Quite in contrast is the story of how the iconic firm of Dun and Bradstreet was trifurcated under the steady hands of its Chairman, Robert Weissman, as related by Ram Charan in his book. One of the fruits of that proactive step is the rise of Cognizant as a Technology major; other off-shoots being A C Nielsen and Dun & Bradsteet Information Services.
Speaking to some independent-minded Board members recently brought to mind some highlights of a recent McKinsey study in 2015 on Board effectiveness. The chief argument in both cases is that to be be truly effective, members need to spend more time in a firm than just attending quarterly Board meetings. While today Board members are primarily involved in business reviews of financial health, there are many voices now urging proactive participation focused on lead measures and not lag indicators which is what most reviews amount to. It is a fine line on how much to involve in strategy formulation and grooming talent without infringing on managerial accountability, but there is a school of thought which believes in erring on the side of doing more than less.
What would work best remains to be answered on an individual case basis. However, what is definitely required is fearless independence on the members' part to ask critical questions meant to safeguard all stakeholders' interests, and not that of just the Promoter. With the goal of better corporate governance, the Companies Act, 2013 (and the amendments to the Listing Agreement) have made it mandatory to evaluate Board performance. While the intent is to provide feedback to the members, this is a new phenomenon still and has to go beyond mere compliance to provide genuine benefits for stakeholders. However, it is a welcome step & in line with various global practices. Will the evaluation extend to third party assessment to truly curb cronyism? It will happen, am sure - not nearly soon enough though.
To read complete issue click here
|
The ELS Lotus logo is trademark of Empowered Learning Systems Pvt. Ltd.