Peaceful Coexistence Does Not Work in Board Rooms: M Damodaran, Ex-chief of SEBI
Moneylife Digital Team 10 January 2022
“If the relationship between the board and the management is not one of constructive tension, I believe no company will extract value from the board and know the board will extract value from the bench. While peaceful coexistence was a very good philosophy, it does not work in board rooms,” says M Damodaran, former chairman of Securities and Exchange Board of India (SEBI). 
 
Speaking as the chief guest during Moneylife Foundation’s inaugural Corporate Governance Award last week, the former chief of SEBI says companies stand or fall depending on their boards. He says, “I am fond of saying this and will repeat this (some of you might have heard this before); peaceful coexistence was a very good philosophy. At one point of time in India and China were pretending to be good to each other. We practised the peaceful bit, and they co-existed on our territory. I am not expanding on that theme but peaceful coexistence does not work in boardrooms.”
 
According to Mr Damodaran, board members need to be relentless in questioning the management. “Board members, who believe they should roll up the sleeves and get into the, you know, pit to wrestle, no, they do not have to do that. All the board has to do is to ensure that the management does its job. Because rolling up sleeves is a management function. The board’s job is to see that the management does its job well. And if it does not, then deal with that situation in terms of can you improve their functioning.”
 
“Size is not the real indicator but the kind of people that get into the board. If a promotor has the courage to bring people who can ask tough questions into the boardroom, no board will extract value from management and vice versa,” he added.
 
The former chief of SEBI also delved into the role played by directors and communication that is taking place between the board and management. He shared some incidents from the past when he was a board member of some public sector bank (PSB) and how the directors used to receive 10 huge volumes of the board meeting agenda when they arrived at the airport for the meeting.
 
“So we have moved from that to where maybe you did not look at those huge books as keeping the table in position saying that the table did not fly off!” he says. 
 
Today, you have directors on board who read, ask questions, and some of the regulations have the secretarial standards that mandate the sending out of agenda, a week at least in advance.   
 
Mr Damodaran says, “I think genius is something that you cannot suppress, and some company secretaries have found the way around it. So you will get your documents a week in advance. But it will contain several items like noting of the minutes, the confirmation of the minutes of the previous meeting granted leave of absence and the action taken report (ATR).
 
“What you will then get a number of items with, where it will be said a presentation will be made during this meeting, and seven days before you ever received what passes for the agenda notes and all that you are getting to see is the presentation will made at the meeting. You are none the wiser as to what is going to be presented, and you will get into that without getting any kind of insight like what is the nature of the proposal, if any, is there something that is being held back, is there suppression of vital information?” he added.
 
“The other thing which I am fond of repeating is that while the agenda notes are important,” Mr Damodaran says, adding, “But the most important in my view, and companies are practising it increasingly now, it was not the situation two or three years ago, is a properly constructed action taken report, which I call the control instrument for the board to decide whether the decisions that have been taken are actually being followed up by the match the ways you can go into boardrooms you can have endless conversations. You think you have made fantastic points come away.”
 
The former SEBI chief also raised an important issue of representation of women independent directors on the company boards. “Are companies appointing woman independent directors or independent woman directors? There are only directors in a company, not a man or woman director. Are women being appointed on the company board because of their talent or as tokenism? Most are doing it just to tick the regulatory check box. Some claim they are doing to give justice to the talent of women, but why do they take so much time to recognise the talent and board resolution,” he asked. 
 
After the regulator introduced the provisions, some women were approached by companies to become independent directors on their board. A few of them consulted Mr Damodaran. 
 
He says, “I told them the only way you can deal with it is you know better than I do about your time constraints. However, do ask that person who invited you on the board one question. Do you want me on your board to tick the box. Or, do you think that I will contribute to your board genuinely? You must anticipate their response like a chess player. If the response is you will add great value, then please ask the second question and hopefully the last one to the day, saying, if you thought I was going to add value, why did you wait for the regulations? You could have reached out to me before the law said that you needed to have somebody like on the board.”
 
Mr Damodaran also expressed anguish over the introduction of newer regulations for each delinquency by a company. He says, “Before new regulations are introduced, it must be analysed if better enforcement of existing regulations can address the problem. Before writing new regulations, do a cost-benefit analysis and regulatory impact assessment. Most importantly, all regulations must have a sunset clause, else you cannot take away redundant regulations. It should be done like what Reserve Bank of India (RBI) has been doing. RBI withdrew 104 regulatory instructions and circulars that have become redundant or were duplicated as per the Regulations Review Authority’s interim recommendation (RRA). Why this cannot be followed by all other regulators?” 
 
“What Moneylife Foundation has done for recognising good corporate governance is a great first step. However, I would suggest you also have an award for the best and most informative annual reports for companies. At present annual reports are full of complex sentences and in a language that is difficult to understand for a common investor. Language is used to conceal thoughts, and we should identify people who do this. Communicating in simple language is important,” he says.
 
Mr Damodaran also requested organisations like Moneylife Foundation to raise voice against absenteeism in a company board meeting by directors. 
 
During the online Award function, the former chief of SEBI, announced Hyderabad-based Natco Pharma Ltd and Chennai-based Thejo Engineering Ltd are the winner and runner-up of Moneylife Foundation’s inaugural Corporate Governance Award from five short-listed companies. Five finalists for this year’s award were: KPR Mill Ltd, Laurus Labs Ltd, Natco Pharma, Suven Pharma Ltd and Thejo Engineering. (Read: Natco Pharma, Thejo Engineering Are the Winners of Moneylife Foundation’s 1st Corporate Governance Award)
 
Here is the video of Mr Damodaran’s speech…
 
 
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