Edits & Columns

Governance guidelines for CPSEs Greater analysis is required on the risks before implementation YRK Reddy   Two important policy moves were made on March 8, 2007 for India’s central public sector enterprises (CPSEs). First, the Prime Minister exhorted them to get listed, as that would enhance professionalism of boards as well as bring in greater efficiency and effectiveness in decision-making. Of 239 operational CPSEs, only 44 are currently listed. Public listing will boost valuation of assets impressively, induce greater market discipline and enlarge the scope for strategic moves such as mergers and acquisitions. Hopefully, public and employee ownership of 15-25% of the company will not be opposed. Second, the Union Cabinet gave its approval to fresh guidelines on the corporate governance of CPSEs. This, indeed, is a pioneering initiative as they apply equally to both listed as well as unlisted ones. An important aspect of these guidelines is the induction of independent directors on the same lines as the publicly listed ones, reflecting hope for the “professionalisation and empowerment” of CPSE boards. There are two problems in this assumption. First, in a coalition democracy, the appointment of independent directors is also a compelling opportunity for advancing political interests. Reportedly, the selection and appointment of independent directors even amongst the listed CPSEs has seen intense tussles between concerned ministers and search committees, with the former winning in many cases. The guidelines might well set the cat among the pigeons. The second problem arises from the known dynamics of linkages among independent directors, corporate governance and firm performance. To be sure, independent directors are one of the many prescribed mechanisms of improving corporate governance, for enhancing shareholder value and sustainability of the firm—the others being separation of chairman and the CEO; incentive/disciplining structures for board and management; ownership control structures, particularly the interface between the ministry and the firm in the case of a CPSE; external/institutional mechanisms and the like. Thus, while it is possible that other internal as well as external mechanisms contribute better to corporate governance, firm performance and competitiveness, political appointments may actually worsen them. In a coalition democracy, the appointment of independent directors to boards of CPSEs is also a compelling opportunity for advancing political interests Further, the competence of independent directors is a critical condition. Competence goes beyond mere qualifications and background—it includes the motivation to learn continuously, be engaged with issues, contribute and perform. Thus, highly qualified independent directors who have no clue of the business model or the motivation to apply themselves on strategic issues will hardly contribute to the company. On the other hand, if such directors happen to be representing a specific constituency or interest group or are beneficiaries of political patronage, they could destroy value. This indeed has been noted in a survey in the US where more outsiders on the board were negatively related to firm performance, as they may be there as proxy for sectional interests. This, however, is not to say that there is no evidence of beneficial outcomes from independent directors. There are several studies from the West which have linked the presence of competent independent directors to lower levels of fraud, better discipline in management, better deliberated and objective debates in decision-making processes, elevated strategic decisions, higher shareholder value and lower risk. In the case of Navratnas, my experience has been that independent directors do mediate well between corporate interests pitted against public policy pressures. They generate more choices while making decisions and challenge the management with better targets and critical performance indicators. But there are fewer anecdotes of that kind and more of callousness, complacency and indirect exploitation of their position by several independent directors. Apparently, more needs to be understood, analysed and sanitised before these guidelines are implemented. Otherwise, the policy could become the paradox of Aladdin shouting “Open Sesame” to the gates of the treasure trove and then forgetting the term to close them!

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