Change the norms

Most nominated directors on the boards of companies do not bother to ask the right questions to the management

The report that the government will not be a silent spectator at the forthcoming board meeting of ICICI Bank suggests that it is likely to raise issues of conflict of interest and corporate governance involving its top management and try to get answers through its nominee on the bank’s board. There is little harm in questioning the management of the bank over why the matter was not looked into earlier and if it had been looked into why action was not taken in the manner it is being done now. However, the question that has to be answered is why the government needs to wait for a crisis in order to address conflict of interest issues at the highest level in banks.

There are more questions: What were government-nominated directors doing all this while? Why didn’t they raise questions about the conflict of interest earlier when complaints were first made by an investor? If they did ask all the relevant questions and the management and board members ignored them, why was the matter not brought to the notice of the government?

This is not about one bank. A fact, simply stated, is that the government-nominated directors or financial institution-nominated directors have largely failed in discharging their duties. Most nominated directors on the boards of companies do not bother to ask the right questions to the management when the seeds of a crisis are being sown. In fact, the majority of companies, which have opted for insolvency proceedings under IBC had nominated directors on their boards. Yet, those companies came under heavy debt and are now under the hammer.

The problem lies in the attitude of nominated directors. For the majority of them, attending a board meeting is a formality which they have to fulfil till they are on the company board. There has hardly been any instance of a government nominee acting like a whistle blower. Indeed, the whole idea of having a nominated director was to ensure that not only the interests of a lending institution would be protected but because these directors were not related to the promoters, they would not hesitate to take a stand which might be against the promoter but in the interests of company and its minority shareholders. In effect, promoters were able to manage the nominated directors one way or the other and made them rubber stamps.

There is a need to change the rules, which govern the role of nominated directors. But the objective of those changes should not only be to give them more responsibility but to bring about a change in the underlying attitude of nominated directors by making them proactive and genuinely independent of the management and other board members. Firstly, in order to do this, the norms should allow only a professional who has knowledge of the industry concerned to be nominated as director. Problems often arise because a nominated director is not equipped to ask the right questions of the management. So an expert who has worked in that industry and has a reputation of integrity should take up such responsibilities. Secondly, nominated directors should be paid well, not just the customary fee which is paid for attending meetings. This payment should not be made by the company but the institution appointing them. Such a step will keep them free from the pressure of inducements.

Meanwhile, they should be made more accountable. It should be their responsibility to report to the market regulator if they have any doubt about the polices being followed by a company. This will help regulators to take proactive steps rather than asking for forensic audit following a crisis. It should also be incumbent upon the nominated directors to make regular disclosures of their own possible conflict of interest, both at the time of being on the board and even after they have left the board. Only when there are efficient and truly independent nominated directors, will there be an improvement in corporate governance standards.