Sunday, November 06, 2016

Indian Hotels independent directors' move is a first of sorts

The unanimous support that independent directors of Indian Hotels Ltd have given to Cyrus Mistry is a first of sorts- so far a I can recall- and it adds to the damage done to the Tata group done in recent weeks. The six independent directors said:

After deliberations, the independent directors came to a view that being a listed company, it was imperative for the independent directors to state their views to the investors and public at large, such that those who trade in securities of the company make an informed decision,

Taking into account board assessments and performance evaluations carried out over the years, the independent directors unanimously expressed their full confidence in the chairman, Cyrus Mistry, and praised the steps taken by him in providing strategic direction and leadership to the company.

The independent directors have thus gone against the preferences of the dominant shareholder, an act of defiance that is entirely welcome, given that independent directors in India are widely perceived as chamchas of the promoters, often backing them to the detriment of the interests of minority shareholders.

It would be premature, however, to conclude that this marks the beginning of a trend. For one thing, we do not know how many of the independent directors were appointees of the Tata group and how many were appointees of Mr Mistry. Independent directors need to be independent of both promoters and management (although often the two are the same in Indian companies).

Secondly, I fear that promoters will now become even more circumspect in their choice of independent directors- they will only pick independent directors of whose loyalties they can be entirely certain. Perhaps, we will see more distant relatives and ex-employees as independent directors. The outcome of the Indian Hotels' independent directors could thus be turn out to be quite perverse in the long run. We need radical changes in the process of appointment of independent directors of the sort I have long advocated (see my earlier post on the Tata controversy).

Meanwhile, the blog post of Nirmalya Kumar, the former London Business School professor, who was advising Mr Mistry on strategy and was asked to go along with Mr Mistry, has elicited widespread sympathy.

It's not just the summary removal that is the issue. Prof Kumar joined the Tata group, he did not join Mr Mistry in a personal capacity. It is not that he was implicated in any improper decisions. Is it the contention of the Tata group that when a Chairman or CEO is removed, those around him must leave because they were "close" to him? I know this happens all the time in many places. Somehow, one expected things to be a little different at the Tatas.


Sapan said...

Opinion expressed on appointment process of ID is so very true. The nexus between promoter/management and Independent Directors should be curbed somehow. Appointment of ID in certain class of companies (by size, or minority stake etc) can be governed by a government regulator, who will decide the remuneration of such ID. There can be a remuneration framework that can be developed for ID, the way we have MD remuneration schedule in Companies Act.

I would like to raise one more issue here - and it is independence (in appointment or in action) of statutory auditors, who are also required to give CG certifications. We all know the sub-optimal CG practices in India by or through India Inc; but how many Balance sheets of India Inc are really getting qualified by statutory auditors? None or handful. So on one hand we have messy CG practices in Inc, and on other hand we have clean (CG) audit reports. Isn't this a big dichotomy? I will draw allusion of statutory auditors responsibilities in US, after Enron saga and enactment of SOX. Responsibilities, liabilities & repercussions casted on US auditor vis-à-vis Indian are quite wide.

The way we are surmising role of ID, we should also challenge and thereby strengthen the role of auditors. MCA has done quite a bit of it in Companies Act 2013, but implementation still remains a challenge.

Bob IFSC Code said...

You are right, It is very challenging for the normal people out there..!!

Sanket said...

I think the issue is at two levels. One is the protection of the interest of minority shareholders in Tata companies, where Tata Sons are the dominant shareholder, and the second is the protection of the minority shareholders of Tata Sons, among whom the Mistry family are the most prominent. If Tata Trusts are directing Tata Sons to redirect resources from the highly profitable TCS, where Tata Sons have 73.33% stake, to the less profitable Tata Motors and tata Steel, where they have around 32% stake, the minority stakeholders of Tata Sons are doubly inconvenienced.

This also led to a conflict of interest in Cyrus Mistry's position as head of Tata Sons because the interest of the majority shareholder (Tata Trusts) and his family are different.