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Best Use Of The Board

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 I recently took part in an instructive discussion on how to get the best out of the board. I liked the approach of Ashley Summerfield to the question, which begins with the proposition that the board of directors is the supplier of wisdom, whilst the chief executive officer is the buyer.

 
This is an interesting approach; it posits that there is a market in wisdom, from which one can hire ripe wise fruit in the form of experienced, thoughtful people. The CEO goes into the market and hires the wise men that best meet his needs.
 
The question that arises is, how is the CEO to measure the wisdom of potential directors? People do not wear wisdom on their sleeves. It would be nice if there was a pulpit where potential directors went occasionally and spouted wisdom; CEOs could then go and listen to them, and make up their minds on who suited them best. That might have been fine in the times of ancient Greece, but today, the choice is too great, and time is too short for a CEO to adopt this method. It may come back into fashion; Youtube or a similar outfit may start a wisdom bank, in which wise men may post select videos of themselves. Then CEOs could surf the site and find the most appropriate directors. But we are yet some way away from this facility.
 
In its absence, CEOs are reduced to two main methods of selection. One is from their acquaintances. These are the people whose wisdom he would have had a chance to test. The other is word of mouth. He could rely on the judgment of people whom he respects, and thereby expand the population from which he may select.
 
It is widely believed that Indian CEOs pack boards with their friends and cronies. A seat on a board is regarded as a favour that is in the power of the CEO to make. Boards are commonly looked on as old boys’ little gangs. Recently, the minister for corporate affairs got upset about his, and ordered all companies to have at least two independent directors by a certain date. I do not know what was the outcome of his campaign, but it cannot have been spectacular, for I do not know how anyone, let alone a minister, can judge whether a director is independent. In any case, when the minister said independent, he did not mean wise; he merely meant not a friend of the promoter. And the reason why he wanted independent directors was not that they would improve the running of companies, but that they would make collusive fraud more difficult.
 
The point is that CEOs or promoters do not necessarily choose friends and acquaintances for directorships to do them a favour; they choose them because their friends and acquaintances are the only people they know well enough to judge whether they would make good directors or not. There is nothing reprehensible about appointing people one knows on the board. A good CEO is not one who finds unknown people for the board; he is one who has a large circle of friends and who is garnering wisdom from them all the time.
 
Ravi Bhargava, once CEO of Maruti Suzuki and now director-at-large, had a number of practical suggestions in the Indian context. He said that the board could supply wisdom only if the CEO was an informed and motivated buyer. In his experience, statutory matters take up too much of boards’ time; they hardly ever get down to discussing important things. In his view, boards should hold an additional meeting every year to discuss annual and long-term plans, and to review capital projects.
 
The typical board fees in India are ludicrous; the law should fix minimum compensation, as well as the minimum term of independent directors. Apart from the two currently required statutory committees for audit and shareholders’ grievances, there should be a committee to decide the term and remuneration of independent directors.
 
Rajeev Vasudeva pointed to a largely untapped source of wisdom. He said that few CEOs serve as independent directors in unrelated companies; and yet, they are the group that would be expected to have the wisdom required. Arun Duggal stressed the importance of diversity in the board, and of managing the process of board meetings to get the best value out of them.
 
Listening to these people, I felt a quantum increase in my wisdom in the area of boards. I have not been a CEO; but I have sat on boards. I have enjoyed those best that have had the greatest diversity, and I have admired some CEOs who could play their boards as well as a good conductor could lead an orchestra.
 
The author is Consultant Editor of Businessworld
ashok  dot desai at gmail dot com
(This story was published in Businessworld Issue Dated 11-01-2010)


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