Proper Functioning of Board of Director

I spoke a tad harshly on the recommendations on the Conduct of Board of Directors and its members, particularly the independent directors (Ref: Uday Kotak lead panel –June –Oct 17).  The Panel had, in my view lost sight of fundamentals, or had poorly defined ToR.

I decided to write this note more to clarify my own thoughts. The important, nay vital dots are:

The Promoter Group Power

*A business enterprise is a risky venture; famously, seven out of ten fail.

*Having gained traction and customer acceptance, the promoter borrows from friends and relatives (sympathetic individuals/ entities- comes with a packet of obligation) and having gained or created enough heft / documentary trail goes to the Banks (a cheaper source of funding –only obligation is to service the debt).  

*(Many entrepreneurs willfully remain in the MSME category: our regulatory loads can suffocate entrepreneurial energies).  

*Once the entrepreneurs access the Share Market for Funds, does the need to have a proactive Board of Directors arise.  

***Promoter has “skin in the game” The Banks lend looking at the promoter’s track record. Markets provide equity funds again looking at the promoter group, hardly the Board.

The Role of Board of Directors'

The BoD’s key purpose is to ensure the company's prosperity by collectively directing the company's affairs, whilst meeting the appropriate interests of its shareholders and stakeholders.

Asymmetry of Powers of Members of BoD

The truth is that the Promoters will act as if their personal interests are superior to the interest of other shareholders and even the company. 

And they have the POWER to set the agenda and do so.

The independent directors on the other hand (who are appointed and paid by the Promoter group:  will demur but cannot take a completely adversarial position) have only moral power, lacking any teeth.

This asymmetry of powers if addressed will ensure better governance of the corporate world. 

 Directing the Power of Promoter Group- Measures and Rules

A set of measures that incentivize or moderate the use of Promoter power to the detriment of the Company and other shareholders will be more effective.

A few suggestions: 

1    1. The Board and Operating Management must be separate, i.e. All Board members including the chairman must not be part of Operations Team which reports to the Board.  

a.  The Promoter (group) will be the MD/CEO (as the funds have been provided based on his track record/reputation)

b.      Directors who have DIN should be appointed from the list (approved by Govt/Industry bodies/institutions).

c.       Directors chosen must not have any relationship –personal or business with Promotors (group).  

d.      No director can have more than 4 (four) Board appointments.

e.      Directors remunerations / sitting fees be defined ( as per turnover /No. of subsidiaries/complexity of the Company), and paid out of a fund allocated by Banks (out of the debt)      

      2.  The Promoter (group) must maintain an unencumbered shareholding of min of 30% (say) in the company which must have min of 25% public holding (SEBI mandated).

a.       The Promoter (Group) receives a dividend that is 1.3 times that is approved by the shareholders.

b.      The Promoter (Group) also receives ESOPs.  

      3. The use of Equity or Debt funds that are accessed by the Company as per the Board approval, are misused /diverted

a.       In the event that the funds are diverted for personal gains the other shareholders must be compensated for the costa and opportunity loss by Promoter (Group), say by transferring their shares to others (?) or cash.

          4.  Board mandates Operating Parameters, 1. CA/CL must be 1.3 times and 2. DSCR must be 1.35

a.       If these are maintained the Promoters get a reward in relation to lower interest cost offered ( wrt PLR then and now) by Banks ( for prudent operations)

b.      In the event that these ratios are breached BoD may levy a penalty and/or appoint replacements.

5     5. The Boards of PSUs /Banks must also be subject to above rules (created in the name of and for the benefit of Citizens).    

Now you have a BoD that is truly independent and Promoter (Group) that is focused on the welfare of the Company /other stakeholders. .

A Company Law Board appointed panel monitors the performance of the BoD.