World of Finance: The conundrum of ‘related’ independent directors

World of Finance: The conundrum of ‘related’ independent directors

When boards echo with voices that reverberate the same cultural or familial chords, the essence of having a diverse and independent board is lost

Srinath SridharanUpdated: Tuesday, January 09, 2024, 08:57 PM IST
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Representative Pic | Pixabay

Picture this: a company promoter appoints a family relative to their board of directors. As long as they are within the regulatory definition of being independent, it is okay, though a tad questionable.

Then comes the grand claim — the company proudly announces an upgrade in its governance standards with these newfound “independent” minds. It’s a bit like putting a fresh coat of paint on a wall to cover up the cracks. So much for governance-washing (like green-washing).

Now, if you fret over just family members slipping into the boardroom, here’s a twist. Enter a trend seen nowadays — accomplished individuals, deserving in their own right, but curiously cut from the same cloth as the company’s leaders. Be it in caste, religion, native village or hometown, language, or even through in-law connections or old classmates, a cosy club forms.

Look closely, and you’ll notice a board where (almost) everyone sounds the same. This isn’t a diverse mix; it’s more like a reunion of long-lost twins. The catch here is self-selection bias, where folks with shared backgrounds intentionally or unintentionally gather, diluting the spirit of the diversity rule in corporate governance. How does one then distinguish between tickmarked diversity and actual diversity?

The real concern lies in the erosion of the spirit of board governance. When boards echo with voices that reverberate the same cultural or familial chords, the essence of having a diverse and independent board is lost. The very purpose of having a group of decision-makers with varied perspectives is defeated. It's not merely about meeting regulatory standards; it's about fostering an environment where genuine debates and diverse viewpoints can thrive. The danger of having a board composed mainly of individuals with similar backgrounds is that it tends to lead to a monotonous decision-making process, void of the checks and balances that diverse perspectives naturally bring.

Regulations, while crucial, can only go so far in addressing this challenge. They provide a framework, setting the stage for compliance, but they cannot guarantee the authenticity of diverse thinking. The onus is on companies themselves to embrace the spirit, not just the letter, of governance standards. A commitment to true diversity requires a cultural shift within the organisation, a recognition that the richness of varied thoughts is not just a regulatory obligation but an essential ingredient for sound decision-making and ethical leadership.

The true essence of a diverse board goes beyond ticking boxes in various categories; it encompasses a rich combination of perspectives, ensuring a fair approach to decision-making. Diversity should span beyond gender, including a mix of expertise, experience, geographic backgrounds, industry nativity, and even ideological differences. Each facet contributes unique insights that collectively strengthen governance. True diversity isn't a formulaic checklist; it's an amalgamation of varied life experiences and thought processes. A board that encapsulates diversity across all categories fosters creativity, resilience, and adaptability, vital qualities for navigating the complexities of today's business landscape.

A mere checkboxes approach to showcasing diversity on boards is risky as it often leads to a superficial, tokenistic representation. Focusing solely on meeting quotas without addressing the genuine inclusion of diverse perspectives risks diluting the very essence of diversity. This checkbox mentality can result in a board that, despite having a diverse appearance on paper, lacks the dynamic interplay of ideas and experiences crucial for effective decision-making. It's not about meeting numerical targets but about embracing the richness that diverse backgrounds bring to the table. A deeper commitment to genuine diversity goes beyond superficial compliance and lays the groundwork for robust corporate governance.

The trend towards increased investor activism concerning the backgrounds of board members is gaining momentum. As stakeholders become more conscious of the impact of diversity and independence on decision-making, there is a growing demand for transparency regarding the backgrounds of those in influential positions. Investor activism is likely to intensify over time, fuelled by the desire for a comprehensive understanding of the varied perspectives within a board. This surge in scrutiny aligns with the burgeoning importance of whistle-blower mechanisms, enabling individuals within the organisation to bring attention to any discrepancies or concerns or favouritism in the board level. Proxy investor advisory firms emerge as critical players in this scenario, serving as intermediaries between companies and investors. These firms play a pivotal role in evaluating and disseminating governance information to the market. As trusted sources of information, they empower investors to make informed decisions and exercise their voting rights effectively during crucial company resolutions.

Often independent directors who sit on boards of many entities end up having few similar IDs as those of their fellow board members on different boards. The concern of independent directors potentially forming inadvertent echo chambers due to commonalities among their fellow board members on different entities is a big challenge in contemporary corporate governance. While regulatory compliance remains intact, the true spirit of independence must be safeguarded. Independent directors should proactively strive to preserve their autonomy of thought and prevent the unintentional convergence of opinions across boards. To mitigate this risk, fostering a culture that encourages dissent, diverse perspectives, and robust discussions becomes paramount. However, it's essential to acknowledge that the realisation of this hidden trap relies heavily on the goodness of intent and the discerning judgment exercised by independent directors. Their commitment to upholding independence, combined with a vigilant awareness of potential echo chamber dynamics, ensures that their role remains untainted by inadvertent conformity, thereby enhancing the effectiveness of corporate governance.

The foundation of good corporate governance rests on the bedrock of human intent towards ethical behaviour. When promoters and boards embrace a commitment to integrity, transparency, and accountability, it resonates through the corporate fabric, shaping robust governance standards. This conscientious approach extends beyond compliance with regulations; it reflects a genuine dedication to fostering a corporate culture based on trust and dependability.

As Indian companies prioritise these principles, they not only enhance their market standing but also become increasingly attractive to global investors. Beyond mere financial performance, investors seek reliability and trustworthiness in the companies they choose to invest in. By embodying these values, Indian companies can position themselves as not just sound business ventures but also as pillars of integrity, drawing international investments for a stronger and more dependable market practice.

Looking ahead, a transformative approach to enhancing corporate governance involves the integration of technology and increased stakeholder engagement. Imagine a future where blockchain technology is leveraged to create transparent and immutable records of the backgrounds, affiliations, and qualifications of board members and key CXOs. This decentralised ledger would provide real-time, verifiable information, reducing the potential for manipulation or misinformation. Simultaneously, fostering active engagement with stakeholders, including investors and employees, through digital platforms and town hall-style discussions, would encourage a more inclusive decision-making process. By combining the power of technology for transparent disclosures with a collaborative, participatory governance model, we pave the way for a future where corporate boards truly reflect diversity, independence, and ethical leadership.

Srinath Sridharan is a policy researcher and corporate advisor. Twitter @ssmumbai

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