Management Conflicts and Board Independence

In the ongoing saga involving the boardroom battle for the Tata
Group, a new development may have significant implications for corporate
governance practice in India. Yesterday, a Tata Group company, The Indian
Hotels Company Limited (IHCL) notified
the stock exchanges
of a meeting held among the independent directors of
the company. It stated:
Taking into account Board
assessments and performance evaluations carried out over the years, the Independent
Directors unanimously expressed their full confidence in the Chairman, Mr.
Cyrus Mistry and praised the steps taken by him in providing strategic
direction and leadership to the Company.
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.
This stance adopted by the independent directors of IHCL has
left some with bewilderment, and others with dismay. How can the independent
directors of a listed company take sides in a corporate battle? Is this further
step towards a prolonged legal battle? Does it make the removal of the chairman
from the listed companies a daunting task? Apart from these somewhat
sensational questions, saner
voices
have welcomed the stance of IHCL’s independent directors, as this is
precisely what they are expected to do under law, i.e. take a stand in the
interests of the company and its minority shareholders. In this post, I outline
some of the broader corporate governance implications of this development, and
the lessons this might provide not just to the other Tata Group companies, but
also to corporate India in general, particularly when boards are acting in the
wake of a corporate crisis.
First, it is imperative that the
boards and, more importantly, independent directors of each of the listed
companies within the Tata Group take a position, and make that known to the
investors and other stakeholders. This is the bare minimum requirement. As I
had previously
noted
:
… what is the role of the
boards of various listed companies within the group? At one level, the board’s
attention may not be called for as the various events have occurred at the
promoter level. The listed company boards have neither considered nor taken any
decision. But, that would be too simplistic and naïve an approach. Given that
the recent string of events have a direct impact on the shareholders and
stakeholders of these listed companies, the boards must state their position
and clarify the issues and assuage the concerns of investors.
In its latest stance, the board and independent directors of
IHCL did what they were required to.
Second, this episode informs us
about the role of independent directors, which gets accentuated in case of a
crisis, such as the present one. In such a scenario, the independent directors
are called upon to take a more proactive role in ensuring that the company
deals with the crisis in a manner that minimizes an adverse impact on minority
shareholders and other stakeholders. This is also consistent with the
requirements imposed by law. For example, Schedule IV to the Companies Act,
2013, which contains a Code for Independent Directors, encourages independent
directors to meet separately without the presence of management in what is
known in corporate governance-speak as executive
sessions
. Moreover, the Code also sets out the roles and functions of
independent directors, which include: (i) safeguarding the interests of all
stakeholders, particularly the minority shareholders; and (ii) moderating and
arbitrating in the interest of the company as a whole, in situations of conflict
between management and shareholder’s interest. The independent directors of
IHCL may have been guided by these obligations imposed by law.
Third, the duties of directors
as a whole (whether independent or not) have been codified in section 166(2) of
the Companies Act, 2013, which states:
(2) A director of a company
shall act in good faith in order to promote the objects of the company for the
benefit of its members as a whole, and in the best interests of the company, its
employees, the shareholders, the community and for the protection of
environment.
(3) A director of a company
shall exercise his duties with due and reasonable care, skill and diligence and
shall exercise independent judgment.
In discharge of these obligations, the law is quite clear that
directors are required to act in the interest of the company and its
stakeholders, and they ought not to be motivated by any other interest, and
certainly not their own. Even if a company (such as IHCL) is part of a broader
corporate group (such as the Tata Group), the board of each company must put
the interests of its own company as paramount, especially if such interest were
to be inconsistent with the interests of other companies within the group, or
even the group as a whole. The discharge of these duties becomes somewhat
complicated when there is a conflict between members of the management and
promoters. In such case, the directors of the company must do what is best for
the long-term interests of the company, even if that means taking some
unpleasant decisions. It appears that the board of IHCL decided to don the
mantle.
In all, my ivory tower existence does not permit me to second
guess the specific decision taken by the independent directors of IHCL in the
context of the disputes relating to the Tata Group. But, what is more important
is the manner in which they performed their role, i.e. to take a position on
the issues and to communicate it to the shareholder and other stakeholders.
Their actions may pave the way for other Tata Group companies to take a stand
on the issue.
In the past, both on this Blog and elsewhere, several
commentators have criticized the utility and performance of independent
directors on corporate boards in India. Much of this was to do with the gaps in
the legal requirements and corporate governance norms. Now that the gaps have
been substantially addressed in the Companies Act, 2013 and the SEBI (Listing
Obligations and Disclosure Requirements) Regulations, 2015, boards and
independent directors are likely to be more proactive in their efforts to act
in the interests of minority shareholders and other stakeholders. We may just
have witnessed one such example that takes corporate India in that direction.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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