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Business News/ Companies / Long tenure of chairman impacts board independence

Long tenure of chairman impacts board independence

Long-serving chairmen have the last word in decisions, say experts; firms say decisions are taken unanimously

A long-serving chairman is more likely to dictate his terms owing to the ‘camaraderie and personal equations’ shared with the board members.Premium
A long-serving chairman is more likely to dictate his terms owing to the ‘camaraderie and personal equations’ shared with the board members.

Mumbai: Larsen and Toubro Ltd, Housing Development Finance Corp. Ltd (HDFC), and ITC Ltd are the bluest of Indian blue chips. They are also among the few Indian companies that have no clear promoter entity and are run by professionally managed boards. There is another similarity between the three—each has a long serving chairman who has become synonymous with the company, a fact that has invited criticism from several corporate governance experts.

Although these chairmen own limited equity in the firms, they hold considerable sway over decisions even after stepping down from their executive roles, said experts.

For instance, A.M. Naik, 72, has been the chairman of L&T since 2003, has extended his tenure as chairman twice and holds 0.16% stake in India’s largest engineering firm.

To be sure, Naik has earned the top slot by rising through the ranks after starting as a junior engineer. The company credits him with making L&T one of the most admired firms in the country today.

“The chairman has more than 45 years’ experience in the company. He understands each and every business and activity of the firm. Some of the businesses have been incubated by him. Hence, he is also looked upon for guidance by the board on the subject matter," an L&T spokesperson said in an email response to a query by Mint.

The spokesperson further said if there is a difference of opinion between the chairman and other board members, the chairman “ensures that all board decisions are arrived only after unanimous concurrence has occurred and the issues are thoroughly debated and presented with facts and figures".

Deepak Parekh, 70, has been serving as the chairman of HDFC for nearly 22 years. He holds a meagre 0.14% stake. And, Y.C. Deveshwar, chairman of Kolkata-based ITC has been heading the firm for 19 years now and just holds 0.02% stake in the company.

Keki Mistry, vice-chairman and chief executive at HDFC, said that during any discussion if conflicting views are expressed by the board members, they are given a “patient hearing" by all present and detailed presentations are made on critical topics.

“The corporation appreciates and recognizes the importance of leveraging on the expertise of such an experienced and diverse board. It is ensured that the board is provided with all the information and the documents with regard to agenda items, which helps the directors to take informed decisions," said Mistry.

Experts are not convinced. Most get to have the last word, says Shriram Subramanian, founder and managing director of InGovern Research Services Pvt. Ltd, an independent proxy advisory and corporate governance research firm.

“Over a period of time, there is a conspiracy of silence where directors do not voice their opinions freely and end up in group think with the views articulated by the powerful chairman. The decision making power becomes concentrated in a few hands, and the other board members do not express their views independently." said Subramanian.

The composition of the board and how often it changes also makes a difference. The trend in this regard has been divergent among these companies.

Mint analysis also shows that in the last nine years, ITC’s board has been revamped the most while HDFC’s board composition has remained almost the same.

According to a spokesman for ITC, the company’s board comprises 50% independent directors, with more than two-thirds of the board comprising non-executive directors.

“All major agenda items for the board are backed by comprehensive background information to enable the board to take informed decisions," the spokesman added in an emailed response to Mint.

In the absence of a board revamp over long periods, a long-serving chairman is more likely to dictate his terms owing to the “camaraderie and personal equations" shared with the board members, said Subramanian.

P.C. Narayan, visiting faculty for finance and control area at Indian Institute of Management, Bangalore, however, says that successful chairpersons know from experience that filling the board with people who agree to everything they say will perhaps not do the company much good in the long term and will be viewed negatively by analysts and financial markets.

Narayan adds that good chairpersons know when to hang up their boots and hence their long tenure should not be a cause of much worry. “Good chairpersons and CEOs are very introspective about their own performance at the helm of the company and know when to step aside and hand over the reins, in many ways like good sportsmen who know when to retire from the sport that they have excelled in," he said.

Every year, one-third of the board members retire and typically over a period of three years, the board composition can be changed entirely. In most of the cases, however, members opt for a re-appointment.

Even as these firms have done well through several ups and downs of the economic cycles and the companies attribute their success to their long-serving chiefs, there is an urgent need for succession planning, says Amit Tandon, founder and managing director of Institutional Investor Advisory Services India Ltd, a proxy advisory firm.

“Although companies—L&T and ITC—have delivered strong performance (and shareholder returns), companies need fresh ideas and need to rejuvenate and reinvent themselves: markets change, fatigue sets in, so fresh thinking and a fresh pair of legs usually help," said Tandon.

Setting a retirement age and enforcing it is also advised. “Personally, I am agnostic to what this age should be—65, 70 or 75 or whatever. This policy brings clarity to investors not just to existing employees (including whole-time directors) regarding what to expect a few years down the road. We have seen how smoothly this works," said Tandon, citing the example of Tata group’s well-articulated retirement policy that saw Ratan Tata step down from Tata Sons Ltd when he turned 75.

Tandon also said that having a board with multiple influential directors will prevent concentration of power with a single person.

Nevertheless, Narayan feels that leadership at Indian firms has been defined by performance.

“India’s corporate history is replete with evidence where chairpersons or CEOs have lasted a very long time and have taken the company from strength to strength and other cases where the incumbent quit or was asked to leave after a very short tenure at the helm," said Narayan, adding that by and large, a reasonably well functioning corporate system has a way of ejecting those who do not deliver.

This is the fourth in a five-part series on corporate governance framework in India.

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Published: 27 Nov 2014, 12:55 AM IST
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