This was 1986 and, as a breed, corporate raiders were fairly new to the country. The board had convened an extra-ordinary general meeting to decide the company’s fate and the balance rested with directors nominated by the financial institutions. They did the most astounding thing. On the prompting of their bosses in Delhi, they suddenly changed their tune and voted in favour of the raider, upsetting not only bookies’ calculations but also peace of mind enjoyed by Indian corporate chieftains so far.
Institutional directors were appointed to boards of companies that borrowed money from these financial institutions and their sole objective was to act as custodians of public funds. In reality, they usually sat as mute witnesses to various acts of corporate malfeasance and misgovernance, stirring only when they received directions from the government. And, the government officials routinely used these directors as pawns in a complex game of favouritism and cronyism.
There are thousands of examples where the board has jettisoned the interests of minority shareholders in favour of interlopers. In one company, after initially supporting a raider, the institutional nominee directors suddenly changed their spots when the government changed at the Centre. Why? Because the new government was not particularly fond of this raider. In yet another company, an MNC this time, the institutional directors sat tight while the local management turned the company into their personal fiefdom and even ignored the majority shareholders. This time a misplaced sense of nationalism obscured all sense of corporate governance.
How much of that has changed? On the surface, regulator Securities and Exchanges Board of India has been chipping away at the edges to bring in greater levels of corporate governance through something called Clause 49. Essentially, this is part of the agreement that every company has to sign with stock exchanges while listing its shares. This requires every listed company to appoint a minimum number of independent directors on the board. The understanding is that since they are independent, they are not beholden to any member of the management and would thus keep an eagle eye on the proceedings.
However, given the Indian gene pool’s legendary ingenuity, especially in the entrepreneurial space, many companies found ways to get around Clause 49 by appointing relatives and friends as independent directors. This has not escaped Sebi’s notice and some remedial action is expected soon. Indian companies probably drew their inspiration from a large number of US companies where CEOs regularly appointed their friends as directors. These directors, in turn, returned the favour by approving gargantuan pay packages — bonus, stock options and lavish retirement benefits — for the CEO. It is another matter that a number of those CEOs are cooling their heels behind prison walls today.
Well, for motivation, Indian companies need not look further than the government of India. At a time when Sebi is trying to hard-sell minimum standards of corporate governance in India Inc, the government is busy setting just the opposite example. The government recently got all the independent directors – including directors elected by minority shareholders – of public sector banks to step down and has appointed party workers and sundry loyalists in their place. These supposedly ‘independent’ directors include at least five secretaries of the All India Congress Committee, as well as many senior members from the All India Mahila Congress and Sewa Dal. For instance, one socialite-cum-Congress-sympathiser appointed to a PSU bank board has reportedly not attended a single board meeting; ironically, this person has even been appointed to two board-level committees — the special committee for large value frauds and the customer service committee. In another PSU bank board, a Congress leader from Madhya Pradesh has not spoken even once so far. On some other PSU bank boards, these party workers have been known to even canvass for loans.
This being the state of corporate governance, it’ll be a long time before Sebi can hope to implement even the barest minimum standards.