The IndiGo turbulence has again brought the issues of corporate governance and marquee boards into public discourse. This article, however, is not about the airline. It explores ways for directors to engage with business crises and issues. From having little or no understanding of this expression 30 years ago, everybody nowadays comments on the subject.
Having served over 25 boards in five countries over the last 40 years, I realise that board directors should be among the earliest to pick up signals of misgovernance—though, not necessarily, proof. It is only thereafter that the matter likely leaks into the public domain, regulators, courts, and the due process of law. I have written earlier that “directors can be the first to hear the canary in the coalmine”. They should not ignore the signals.
Though non-executive directors possess imperfect information, their work is expected to be effective, for which they have powers and resources. When untoward events occur, people realise that board directorship is no safe sinecure for retired professionals. Discharge of board duties requires sound experience, judgement, and deep intuition.
Non-executive directors can be imperfect individuals who work with incomplete information, but the public expectation from them is high. It remains that other than a competent, well-intentioned, alert, and united board of directors, no better corporate governance system has yet been invented.
Let’s delve into some examples of crisis management by Indian boards.
Around 2001, the regrettable Tata Finance fraud occurred within the Tata Group. No sooner had a whistleblower alerted the group that Ratan Tata received resignations from the existing directors of Tata Finance. He then deputed Tata Sons’ finance director Ishaat Hussain to chair the company and constitute a new board.
Ishaat led the investigation and recovery efforts. Ratan Tata publicly apologised early. There followed lots of bad publicity, hits on Tata Sons’ profits, and shareholder angst before the episode got behind the group.
I have written about an internal fraud that occurred at C G Power in 2019. The independent directors of the then Thapar group company read the early signals of suspicious arithmetical ambiguities in the accounts for three years, though critics feel that they responded too late. They blew the whistle and invited the regulator to do a forensic audit. The promoter-chairman was removed and various other actions followed.
Thanks to the actions of the board, the company was rescued handsomely. Under the Murugappa Group, which acquired it, C G Power was resurrected to achieve a very high valuation.
It’s true that companies feel hassled when they are struck by so-called black swan events—rare, unpredictable occurrences with big impacts that are often rationalised later as foreseeable.
In November 1990, when I was on the Hindustan Lever board, Assam was very disturbed politically. Unilever’s tea plantation subsidiary Doom Dooma Assam received a ransom demand from a militant outfit, the United Liberation Front of Asom, for ₹35 lakh plus a surcharge of ₹2.5 per kilo of tea sold. The company stood firm on not paying the money, but it was deeply concerned about the safety of its plantation executives.
Company leaders like Aniruddha Lahiri and Suman Sinha connected with the appropriate officials and arranged to secretly airlift the plantation managers and their families. It was a colossal task of coordination with Army and Air Force commanders, but it was accomplished without the state government even being aware of the operation. In my experience, this was a rare example of a board getting involved and responding to a black swan event despite imperfect information.
During the 2000s, when Ratan Tata chaired Tata Chemicals, I served as vice chairman. The company had for many years sought a way to manufacture ‘natural’ soda ash in addition to the existing ‘synthetic’ variant. Natural would be cheaper, less energy-intensive, and attractive to customers.
Finally, around 2008, an opportunity arose when Tanzania’s government invited Tata Chemicals to invest in a facility on the banks of Lake Natron. The company management made proposals to explore feasibility and the board readily sanctioned the expenditures. While such financial commitments were ongoing, a credible word came to the board that the edges of the lake Natron were natural nesting sites of the annual migratory Lesser Flamingo birds. This posed a dilemma to the board.
The management collected evidence of the fact, but it was still unclear how a project for natural soda ash would affect the birds’ nesting sites. The subject was discussed by the board and the management on four occasions over several months.
Finally, the board unanimously decided to write off the expenditure incurred—which shocked shareholders when the next quarterly results were announced—and abandon the project on the grounds of the precautionary principle of sustainability. Rightly or wrongly, the directors decided to avoid a potential crisis. If they did not act then, the company could be firefighting if issues cropped up after the project was set up.
The purpose of mentioning these examples is not to suggest that these boards took the right decisions. Rather, it is to illustrate how boards should anticipate issues and deal with them collectively, even though there are uncertainties. These are the times wisdom is called for.
R Gopalakrishnan | BUILDING BUSINESSES | Author whose forthcoming book, Chanakya and Sun Tzu, is coauthored with Nirmala Isaac
(Views are personal)
(rgopal@themindworks.me)