Time For Two-Tier Boards For India Inc

The Infosys brouhaha calls for a complete re-haul of the board. The need of the hour is for a ‘supervisory’ and ‘management’ board.

For better and true corporate governance it is now time for India Inc. to adopt a two-tier board structure. Conflict is inherent in the present board structure, for the entire board is seen to be responsible for any alleged management failure. We are now all-too familiar with how the Infosys issue has played, with the resignation of nearly its entire board.

However, when such corporate governance issues arise, is the entire board responsible? Can the entire board be brought to a grinding halt because of one alleged mismanagement issue?

Incidentally, present boards are at loggerheads with themselves because they have to run the operations and look at the self-imposed aspect of corporate governance. Can a board that takes major decisions on important management issues effectively govern itself?

Incidentally, to enhance corporate governance in the board-room, the Narayan Murthy Committee presented a way forward in 2003 noting that ‘Independent Directors’ must be appointed. SEBI, in its efforts to increase transparency within corporates, particularly in promoter-driven businesses, subsequently introduced a comprehensive chapter on ‘corporate governance’ under Clause 49 of the Listing Agreement. This clause deals with the appointment of ‘independent directors,’ their remuneration and their role in the audit committee. The clause says that nearly 50 per cent of the Board must be independent.

In addition, the new Companies Act, 2013, defined the term 'independent director'. Sec 2(47) of Schedule IV of the Act expounded and listed a large role for independent directors. As a result, this strengthened the role of independent directors. Now independent and institutional directors also have an active role in management decisions, which invariably puts them into an award situation and conflict with the management directors.

In other words, decisions which fall within the purview of the management have to be endorsed by the entire board, including independent and institutional directors. Managements have often compelled independent directors to toe their line, rendering complete transparency and corporate governance in the present board structure just a pipe dream.

We have also observed how boards function. In promoter-led companies, conflicting management decisions are taken, to which independent directors have to conform whether willing or unwillingly. Even in companies where the majority is independent directors, there have been cases where independent directors have been shut down by managements to comply with management decisions.

This has very often resulted in independent and other directors being dragged into litigation due to lapses that stem from inferior management decisions. In cases such as Infosys, the entire board is held responsible for lapses, which we all know was not really the case.

Why A Two-Tier Board

It’s time for SEBI to institute a new board structure: a ‘supervisory board’ and a ‘management board.’ All eminent and experienced members, independent and outside directors including the founders, should find place on the former. The present management, including the managing director, has to be part of the latter.

In a two-tier board structure, both roles of ‘executive’ and ‘non-executive’ directors will be clearly demarcated. The ‘non-executive’ directors in the supervisory board will scrutinize corporate governance and transparency.

The supervisory board should also play roles of mentorship and guidance, much like the role ‘trustees’ play in a Trust. In a supervisory board structure, independent and senior directors can oversee corporate governance misdemeanor or poor management practice by the managing board, and even haul up the management board for mismanagement.

Executive members in charge of operations of the company should be left to the management board. Important decisions such as acquisitions, etc., (which has been the bone of contention in the Infosys saga) will have to pass the scrutiny of the ‘supervisory board’.

Enhanced Corporate Governance

The role of the CEO and chairman too will be clearly separated in the two boards. This will clearly distinguish the roles of different directors, and their legal responsibilities and roles can be separated. In a single board structure, both executive and non-executive directors have the same legal responsibilities.

Some of the countries that have two-tier boards are Austria, Bulgaria, the Czech Republic, Denmark, Finland, Germany, Latvia, Poland, Slovakia and Switzerland. In Germany, for example, the supervisory board can appoint and dismiss members of the management board if there’s adequate cause to suspect mismanagement.

In India, such boardroom fracases can be avoided in a two-tier structure. The supervisory board should have well-defined board practices and be able to inspect all documents of the company.

This two-tier structure will enhance corporate-governance standards in India by leaps because there of pre-defined roles of the different directors. This would ensure that the management board always acts in an appropriate manner for the benefit of all stakeholders. SEBI needs to act fast.