Wednesday, March 07, 2012

Dysfunctional boards

Most people tend to think of corporate boards (including the executive team) as repositories of wisdom, maturity, balance, rational behaviour and what not. The people who sit on it are achievers, they understand business, they know how to take decisions. Shareholders must trust these wise men and women.

I have always been more than mildly sceptical about this elevated notion about people at the top. I am glad now to see it corroborated by FT columnist Luke Johnson. Johnson argues that boards are, in fact, riven by intrigue and manoeuvre - and concern for the company and its shareholders is often the last thing on the minds of people at the top:
Boardrooms are overwhelmingly populated by men aged 45 to 60. By this age, most of the players have worked out that more money doesn’t bring happiness; time is taking its toll; maybe the striving and sacrifices weren’t really worth it; and the participants tend to become more acutely aware of their mortality, shortcomings and missed opportunities. Regrets and anger can become the dominant emotions, as optimism and hope gradually diminish.Thus the boardroom can end up resembling a psychiatric ward. Motivations diverge violently, and maintaining a rational sense of purpose can become impossible.
Johnson suggests that the cure of boardroom dysfunction is to have adequate diversity on boards. I would go further. The answer, really, is wider dispersal of power. If you want companies to do better, undermine the role of boards and CEOs and spread power all across the company. Any takers?


Anonymous said...

In India the Board and CEOs are rather hesitent to diversify the power to lower levels as there is also a question of accountability. So long as the accountability is only with the Board and CEOs, what is the point in only diversifying the power structure? The entire legal frame work has to be modified. At present for all problems only the Board and CEOs are held responsible. The diversification of power is easily said than can be done. It calls for a lot of changes to be made.

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chandramouli said...

If you see section 5 of the companies act, while defining the meaning of "Officer who is in default" virtually the entire responsibility is cast on the Board of Directors, and CEO. Section 581R while defining the powers and functions of the Board puts every activity as the function of the Board including maintenance of books of accounts, preparation of accounts etc. And even Section 581T casts a joint and several liability on the Directos. When the Indian statutes are framed without any intention of diversifying the power to the lower levels and have been framed with centralised accountability on the Board it is premature to think that such diversification of power to the lower levels is easily possible in India. Yes diversification of power is good, but our law does not recognise it.

T T Ram Mohan said...

Anonymous and Chandramouli, It may well be that, legally speaking, all responsibility vests in the board. But we do have delegation of powers even now, don't we? Powers are delegated at various levels and there is accountability.

It is for the board and the CEO to exercise vigil over those to whom powers have been delegated. The fact that some divisional head has responsibility for spending decisions of a few crores does not mean the board is not accountable for it. So, I don't see what the problem is in devolving more power down the line.

-TTR said...

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