The recent resignation of HDFC Bank chairman and independent director (ID) Atanu Chakraborty has once again brought the role of IDs into focus. The starting point for any enquiry into his exit - the bank has appointed three law firms to review the circumstances surrounding it - must be the mode of appointment of IDs.
Typically, the proposal to appoint an ID is initiated by the management or owners of a firm, and they almost always have their way. Many of these appointments also carry significant compensation. Consequently, there is an inherent tilt in favour of the management.
Assuming an ID is not swayed by these factors, what should the role be? Is it to find fault in proposals or assign blame when plans fail? Or to offer constructive criticism that advances the company's business agenda?
The role of IDs is neither to obstruct nor to approve proposals regardless of their shortcomings. From both a business and an executive perspective, it's important for the board to project consensus in its decisions. Implementation marked by hesitancy, or carried out while constantly looking over one's shoulder, can lead to suboptimal outcomes.
No employee would like to be caught in board-level crossfire and become a collateral victim. Hence, it may often be necessary for IDs to go along with a decision they disagree with, provided this happens after a threadbare discussion. Formal dissent should be the exception. For both IDs and the company, parting of ways is better than frequent acrimony.
The other problem is lengthy board notes, which usually run into over 1,000 pages. Poring through them in less than a week is rarely infallible, even after due diligence. Who is responsible for what is contained in fine print or lengthy annexures? Excessively onerous responsibilities cast on IDs have deterred many right-thinking people from accepting such roles.
There could be concerns relating to matters not brought before the board. How would IDs get to know about them? Through disgruntled employees, or whispers in the market? IDs must be careful in going down that path. It could lend heft to factionalism in the organisation, a not-so unfamiliar malaise. Or, it could lead to unforeseen outcomes where the media, too, plays a role, even if unwittingly. Exercised with discrimination, however, this could be one way to keep management on its toes, since it decides what goes before the board beyond its delegated powers.
In the case of HDFC Bank, yet another strand is reported: excessive involvement of the former chairman in operational decisions, leading to tensions with management. While one could have some sympathy for a chairperson trying to delve deeper when he or she suspects irregularities, it's evident that some insulation needs to be provided to management for exercising their freedom within delegated powers.
The distinction could well be between ex ante and ex post involvement in day-to-day management decision-making. If such involvement occurs at the proposal formulation stage, it could avoidably cloud judgement of IDs when board consideration arises, thereby undermining independence.
Shorn of legalese, the core issues are straightforward. Yet, surrounding them are nuances that cannot be captured in their entirety by rules and guidelines. That is where human nature comes into play. Even so, there are many issues here that warrant serious introspection by regulators and lawmakers.
Qualifications, familiarity with extant guidelines on conduct and responsibility, and mode of appointment of IDs need review. A well-balanced definition of their liability is warranted, as also limits of their sphere of activity. For sectors where a regulator exists, greater engagement in the appointment of IDs is called for. Furthermore, a more vigorous approach by MCA to maintaining a panel of IDs is indicated.
The answers to questions posed at the outset in the HDFC Bank case can only be given by Chakraborty and the management. But observations highlighted provide a framework for outsiders to view these developments. It's heartening to note that the management and RBI seem to be moving to address concerns. It would be desirable for Chakraborty to elaborate on the specific concerns he had, at least to the banking regulator. That is the minimum the system owes to investors and depositors.
Typically, the proposal to appoint an ID is initiated by the management or owners of a firm, and they almost always have their way. Many of these appointments also carry significant compensation. Consequently, there is an inherent tilt in favour of the management.
Assuming an ID is not swayed by these factors, what should the role be? Is it to find fault in proposals or assign blame when plans fail? Or to offer constructive criticism that advances the company's business agenda?
The role of IDs is neither to obstruct nor to approve proposals regardless of their shortcomings. From both a business and an executive perspective, it's important for the board to project consensus in its decisions. Implementation marked by hesitancy, or carried out while constantly looking over one's shoulder, can lead to suboptimal outcomes.
No employee would like to be caught in board-level crossfire and become a collateral victim. Hence, it may often be necessary for IDs to go along with a decision they disagree with, provided this happens after a threadbare discussion. Formal dissent should be the exception. For both IDs and the company, parting of ways is better than frequent acrimony.
The other problem is lengthy board notes, which usually run into over 1,000 pages. Poring through them in less than a week is rarely infallible, even after due diligence. Who is responsible for what is contained in fine print or lengthy annexures? Excessively onerous responsibilities cast on IDs have deterred many right-thinking people from accepting such roles.
There could be concerns relating to matters not brought before the board. How would IDs get to know about them? Through disgruntled employees, or whispers in the market? IDs must be careful in going down that path. It could lend heft to factionalism in the organisation, a not-so unfamiliar malaise. Or, it could lead to unforeseen outcomes where the media, too, plays a role, even if unwittingly. Exercised with discrimination, however, this could be one way to keep management on its toes, since it decides what goes before the board beyond its delegated powers.
In the case of HDFC Bank, yet another strand is reported: excessive involvement of the former chairman in operational decisions, leading to tensions with management. While one could have some sympathy for a chairperson trying to delve deeper when he or she suspects irregularities, it's evident that some insulation needs to be provided to management for exercising their freedom within delegated powers.
The distinction could well be between ex ante and ex post involvement in day-to-day management decision-making. If such involvement occurs at the proposal formulation stage, it could avoidably cloud judgement of IDs when board consideration arises, thereby undermining independence.
Shorn of legalese, the core issues are straightforward. Yet, surrounding them are nuances that cannot be captured in their entirety by rules and guidelines. That is where human nature comes into play. Even so, there are many issues here that warrant serious introspection by regulators and lawmakers.
Qualifications, familiarity with extant guidelines on conduct and responsibility, and mode of appointment of IDs need review. A well-balanced definition of their liability is warranted, as also limits of their sphere of activity. For sectors where a regulator exists, greater engagement in the appointment of IDs is called for. Furthermore, a more vigorous approach by MCA to maintaining a panel of IDs is indicated.
The answers to questions posed at the outset in the HDFC Bank case can only be given by Chakraborty and the management. But observations highlighted provide a framework for outsiders to view these developments. It's heartening to note that the management and RBI seem to be moving to address concerns. It would be desirable for Chakraborty to elaborate on the specific concerns he had, at least to the banking regulator. That is the minimum the system owes to investors and depositors.
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)
Rentala Chandrashekhar
Rentala Chandrashekhar is former president, Nasscom