The former SEBI chairman has some serious reservations about the way boards function in India. In the aftermath of the ICICI conflict of interest case, Damodaran has been quite vocal about the role that directors of the board play in such exceptional events. According to Damodaran, in the ICICI case there was no need for the chairman to come and give a clean chit to the CEO. Even the board should have ideally forced the CEO to focus on corporate governance rather than giving a clean chit to the CEO. There are some key issues here…
How independent are boards?
This question has come into reckoning time and again. In the case of Tata Sons the ouster of Cyrus Mistry from the board had the tacit connivance of most of the board members including the independent directors. According to Damodaran, the question is not of whether the promoter or the CEO is right or wrong. That is not for the board to decide. The board’s job, especially of the independent directors, is to ensure that the interests of the small and minority investors are adequately protected. In the case of Tata Sons, only Nusli Wadia (himself a prominent industrialist in his own right) actually stood up against the management. It is a different matter that he was ousted but the casualty in these cases was the interests of the small and minority shareholders, who do not have a voice.
A repeat in the Infosys case…
We saw a repeat of this conflict in the case of Infosys. The promoters who jointly held about 10% of the company’s shares could actually browbeat the board into removing the CEO, Vishal Sikka. Without going into the merits of the case, the principal question is whether the independent directors on the board did anything to protect the interests of the shareholders. In India, most domestic and global institutions do not play an activist role in the company. Instead, they prefer to go along with current management of the company unless the situation becomes too difficult as in the case of Infosys. Damodaran’s contention is that in either case, the independent directors have either stood by the CEO or by the promoters but never on the side of the small shareholders.
Where is the governance?
According to Damodaran, the biggest challenge here is that the concept of independent directors on the boards is not serving the purpose. Obviously, most independent directors seeking a seat on multiple boards do not want to antagonize either the CEO or the promoters. As a result, the small shareholders have nobody to represent them. Damodaran is right in the sense that the whole idea of bringing in better governance standards through outside directors is being defeated!
