When Kingfisher Airlines went bankrupt and Vijay Mallya absconded to foreign shores, the post-mortem investigation opened a Pandora’s box. Misgovernance and financial mismanagement brought down the luxury airline after seven operational years, with accumulated losses of more than `9,000 crore. It was alleged that the owner cheated banks by over-invoicing and diverted the loan money from banks to tax havens overseas through dummy directors and shell companies. The Serious Fraud Investigation Office (SFIO) also found that the owner ‘roped in persons of eminence’ to make banks ‘believe that corporate governance was not lax’.
This case is an excellent example of the enormous invisible pressure on directors who may inadvertently become party to promoters’ misbehaviour. Boardrooms are, after all, constituted by humans who are susceptible to misbehaviour. These can range from outright fraud, light internal audits, unqualified board members to inconsistent delegation of duties leading to governance failures.
These failures usually relate to three levels of governance: the structure of the board, the governance culture and the governance behaviour. There are certain key cognitive biases that can impede the effective functioning of boards at these three levels. These biases influence our thinking unknowingly. This tendency can be traced back to the propensity of the human brain to simplify information through a filter of personal experience and preferences. For instance, some people believe that good-looking people are smart or that confident politicians are competent. On a positive note, there are prescribed mechanisms to help recognize these biases and work towards mitigating them, which all directors must learn to do.
This chapter discusses the three levels of governance, breaks down the biases that impede them and prescribes mechanisms to mitigate them.
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Governance Structure
Much of the discussion on boardroom governance has to do with governance structure. Therefore, concerns about the independence of the directors, their skill sets and competencies, their backgrounds and their diversity are crucial elements related to governance structure. However, these components of governance mostly miss the human factor or have the authority bias that probably exacerbates concerns in boardrooms.
Authority Bias and Long Tenures
The authority bias refers to the human proclivity to defer to authority in all situations, more so in boardrooms, which can have serious consequences for the company, its stakeholders and even the nation.
Imagine a corporate board comprising ‘independent directors’ as required legally. However, these directors are connected with the owner or promoter through various business or social relationships. Alternatively, their board appointments may have happened through word of mouth or through fellow board members’ recommendations. Such boards consist of people who agree with or are known to and reliable for the promoters, thereby representing a safe proposition for them. However, such boards become breeding grounds for obedience and lack of dissent, owing to a clear manifestation of an authoritarian figure. This can potentially compromise the system of direction and control of the organization and lead to misbehaviour.
Take the case of Victoria’s Secret, the American lingerie, clothing and beauty retailer. The company found itself in the eye of a storm due to several issues, including some related to its governance structure, especially after 2016. In an open letter to 81-year-old Leslie Wexner (the company CEO and chairman of the board of Victoria’s Secret), an activist investor group by the name Barrington Capital, pointed to issues stemming from the lack of independence of and diversity in the board. From the 12 directors on the board, eight were found to have strong social and professional ties with Wexner and his wife, as well as with each other, either through the community in Columbus, Ohio, where the company was headquartered, or through the Ohio State University—home to the Wexner Centre for the Arts and the Wexner Medical Centre. The activist group also questioned the actual independence of these eight ‘independent’ directors. The Barrington Group also raised vexatious concerns over long-serving board members and forced the company to make some changes.
The authority bias gets concretized due to long tenures of board members which erodes their actual independence from the owners or promoters. In case of Victoria’s Secret, three directors had tenures lasting more than 36 years. These members included David Kollat (the chair of the compensation committee and a former company executive, who served as a director for over 42 years) and Allan R. Tessler (the lead independent director, chair of the nominating and governance committee who served as a director for over 31 years). Barrington Capital also noted that the company lacked ‘directors with a diversity of backgrounds, skills and perspectives sufficient to meet the strategic needs of the company’.12
This excerpt from Inside the Boardroom has been published with permission from Rupa Publications.