Institutional EYE

Commentary on Corporate Governance Issues

Board seats – a right or a privilege?

October 12, 2018

Recent instances of board members holding onto their seats against several odds has created a broader debate on whether being on a board is a right or a privilege. Directors fighting to stay on may have justifications for their actions, but they must ask if their fight to stay on the board is serving the company’s stakeholders.

 

Board members have a fiduciary responsibility towards the company and its stakeholders. They hold trusteeship positions, ensuring that the agenda of all stakeholders are being addressed by building those into the long-term and short-term goals of the company.

 

The past year has seen some board members fight to stay in the seat. One could argue that there is a legitimate reason for doing so. Or that their removal was virtually unfair or even manipulated. Even so, board members have handled almost similar instances differently.

 

Take the case of Cyrus Mistry. After having been relieved of his responsibilities at Tata Sons, he fought to stay on the board of the listed Tata companies. The controversy raged for several weeks until the shareholders were asked to vote on this removal. He resigned before most of the EGMs could be held, but continues to fight Tata Sons in the NCLT and the courts. That he has a right to a board seat by virtue of his family’s equity in Tata Sons is a different matter altogether.

 

While Cyrus Mistry could argue that his removal was unfair, in an almost similar scenario, Vikram Pandit was removed as CEO of Citibank on the day that he announced a strong quarterly performance. Wrongfully or not, the board had lost confidence in the CEO – one that had pulled the bank out of a crisis, and worked for a one dollar salary during its difficult times. Vikram Pandit decided not to fight the board, but to gracefully resign.

 

Equally, some Indian promoters, though, seem to set themselves up with a different yardstick – assuming that they will always have a divine right to be in the driver’s seat. Some promoters have named themselves as Chairperson of the board in the company’s Articles of Association (AoA). This gives them, as individuals, the right to a board seat – and Chairperson – independent of all else. Vijay Mallya is a case in point – under a shareholder agreement with Diageo, he was to remain Chairperson till his shareholding remained above a certain threshold. Despite subsequent allegations of financial misconduct, Vijay Mallya exercised his legal right to remain on the board and Diageo had to eventually pay for his exit. Similarly, Analjit Singh is named as Chairperson of Max Ventures and Industries Limited in the company’s AoA. Shareholders are no longer accepting of promoter permanence, as is reflected in the defeat of Neeraj Kanwar’s reappointment and remuneration resolution at Apollo Tyres Limited’s 2018 AGM.

 

In contrast, Sir Martin Sorrell, founder and head of the world’s largest advertisement agency, WPP, resigned after the company initiated investigations into allegations of personal misconduct: he had led the agency for over three decades. While he rejected the allegations, in his resignation he said, “The current disruption is simply putting too much unnecessary pressure on the business, our over 200,000 people and their 500,000 or so dependents, and the clients we serve in 112 countries. That is why I have decided that in your interest, in the interest of our clients, in the interest of all share owners, both big and small, and in the interest of all our other stakeholders, it is best for me to step aside."

 

India has its own examples too. Dr. P J Nayak went on a four-week leave of absence in 2002 when a draft Joint Parliamentary Committee report charged that he stood to benefit from the failed merger of Global Trust Bank with UTI Bank (of which he was then Chairperson). Vishal Sikka too, despite there being no establishment of wrongdoing on his part, resigned following an onslaught of public questioning by one of Infosys’ founders. In his resignation email, he urged, “If these types of attacks continue, I hope each of you will continue to be the voice of fairness and reason – providing the active, emphatic and unequivocal support that the company, the management, the employees, and all of the stakeholders and friends of the company need in order to succeed.”

 

In most of the recent instances of where directors have fought to stay in the game, one must question if the fight has benefitted the company’s stakeholders. One approach is to say that the wrong must not win - if the removal was unjust, one has a responsibility to fight it. The other argument is that of presumed innocence – that unless squarely proven guilty, there is no need to step down.

 

At the same time, there is an overarching argument of fiduciary responsibility and if fighting to stay on the board is becoming value destructive. The perspective will vary depending upon the set of circumstances. Even so, board members must approach their directorships as a privilege and not as a right. Given the nature of its responsibilities, board members must put the interests of the company and its stakeholders ahead of themselves

 

A modified version of this article appeared on www.moneycontrol.com on 11 October 2018. You can access the article here: https://bit.ly/2A3RUQ6

Tags:

Please reload

Recent Posts
Please reload

Archive
Please reload

Older Posts (till 31 Dec'15)
Please reload