How Deference is Undermining Independent Oversight in Indian Boardrooms

Independent directors (IDs) are considered to be a cornerstone of an efficient corporate governance system. Entrusted with specific duties that focus on upholding ethical standards, they exercise independent judgment and act in the best interests of the company. IDs are expected to discharge these duties through not only ethical conduct and objective judgements, but also strong oversight in cases of unscrupulous behavior, fraud or violations of the company’s code of conduct.

It is true that the role of all directors on a board, and also auditors, is important in matters of oversight. However, the reason IDs matter so much is that they provide a fresh perspective and objectively assess a company’s strategy, goal and situation. With no hierarchical relationship with inside directors, they can make evaluations and supervise management decisions through an unbiased lens.

And yet, a look at financial scandals at mega and high-profile companies in recent times gives rise to an obvious question. The question is, does the high-power distance culture prevalent in India come in the way of IDs performing their duties effectively?

Dysfunctional Systems

High-power distance culture refers to the organisational structure in which individuals accept an unequal distribution of power. A pioneering work of Geert Hofstede, a Dutch psychologist, the central characteristic of a power-distance culture is acceptance of power inequality or imbalance in organisations and society. Studies have shown that the culture exhibits some distinct characteristics and patterns. These are:

1. Superiors with higher power and authority tending to have a centralised and egocentric decision-making style. Through their overbearing and intimidating style, they exert strong social pressure, which puts the individual in a situation of conformity.

2. Individuals exhibit emotional experiences such as fear and anxiety, which elicit avoidance behaviour rather than approach behaviour. They tend to keep silent and are less willing to provide feedback.

3. Individuals obey hierarchy-driven authority even when doing so is problematic. Fear of authority results in compliance.

4. Individuals tend to believe that authority naturally means expertise and wisdom. Further, in view of the perceived integrity of authority, challenging their views is regarded as discourteous, and agreeing or obeying, a wise or strategic choice.

5. Individuals tend to change/tailor their own opinions to suit the authority for fear of being viewed, labelled or evaluated negatively, which in turn, can damage valued relationships, or deprive incentives or rewards.

Indian society is known to have a high-power distance culture. Showing deferential gesture, particularly towards elders and deities, is part of Indian tradition. Indeed, it is a sign of reverence and faith and is well-accepted as a healthy custom. However, when this cultural norm encroaches into a corporate setting and an attitude of excessive deference is extended to figures of authority, more so in boardrooms, it becomes problematic.

The practice can not only stifle independent thought or action, but also breed a dysfunctional system in which individuals, like IDs, can hesitate to ask the right questions or voice dissenting opinions. That high-power distance can negatively shape boardroom dynamics can be understood through many instances of serious financial shenanigans and board governance failures in India.

When Silence is Not Golden

Take the case of Satyam Computers, for instance. Ramalinga Raju was the erstwhile chairman and chief executive of the company, and had won many national and international awards and accolades. Due to his perceived stature, Raju allegedly held influence considerable influence over key decisions. It is said that most people accepted what he said without seeking evidence. IDs, who are expected to act as custodians of governance, reportedly did not question the veracity of his version regarding the alleged fake bank accounts and customer identities involved.

In Bhushan Power and Steel, cited as an example of alleged financial fraud, former promoter Sanjay Singal was accused of carried out accounting manipulations of a staggering magnitude. Reports suggest the company largely operated as a ‘one-man show’. With actual control in his hands, Singal allegedly created around 200 shell companies to launder and siphon off funds, with limited oversight and scrutiny.

Rana Kapoor, another commanding figure in banking circles and recipient of many awards, is reported to have wielded considerable influence on the board of Yes Bank as its managing director and chief executive. Under his stewardship, the bank was said to be run by the management, not the board. His decisions to allegedly lend large sums to struggling companies and sectors reportedly contributed to the accumulation of NPAs. At the time, no red flags were raised.

More recently, in IndusInd Bank, an incident of suspected accounting fraud in the bank’s derivatives book reportedly took place. Perpetrated allegedly by a cohort of senior bank officials for more than five years, the irregular transactions are said to have enabled the bank to either overstate its profit or mask losses. The discrepancies, material changes or mis-statements in financial statements remained undetected for a long time.

The cases of ICICI Bank and Kingfisher also remind us of the high-handed styles exhibited by their then top leadership.

Even in other societies marked by such a culture, such as Japan, tenets of corporate governance sometimes get smothered. Take Olympus Corporation for example. The scandal in the company was one of the biggest and longest-running, loss-hiding modus operandi executed in Japanese corporate history.

A ‘yes culture’ was deeply ingrained in Olympus. Employees did not dare speak against their superiors. Shareholder activism was frowned upon. Under the chairmanship of Tsuyoshi Kikukawai, more than hundred businesses, a majority of them loss making, were acquired. A ‘tobashi’ scheme [a practice that allows companies to hide losses from regulators] was designed to conceal losses. The misadventures of Kikukawai remained unquestioned.

How Do Others Fare?

Here, it would be instructive to place a contrasting board culture in regions with low-power distance. In her insightful paper “How Much Culture is There in Corruption?”, Anna Murdock focuses on how cultural features interact with economic behaviour. Interestingly, a linear relationship was found when a power distance index (PDI) was positioned against the values of Transparency International’s corruption perceptions index (TPI).

A positive correlation is seen between power distance and corruption perception. In other words, countries where power distance is high tend to have high values of corruption perception. Countries like India, for example, with a very high PDI (77), rank very high (96) on the corruption index, whereas Sweden, with a lower PDI (31), i.e., less power imbalance, has a very low corruption index (8).

Clearly, a high-power distance culture supports rigid hierarchy and top-down corporate norms, which in turn influence the way decisions are taken and authority is exercised.  In an interesting study “Being the Boss in Brussels, Boston and Beijing”, Erin Meyer maps leadership cultures across 19 countries. Describing how culture has a bearing on attitude towards decision-making and authority, her research shows a range along a continuum in which attitudes vary across geographies.

Again, the contrast is glaring: while Scandinavian countries have a robust egalitarian and consensual culture, India is high on top-down and hierarchical frameworks. One aspect that is discernible is that unlike vertical hierarchies, which engender power imbalance, Scandinavian countries have generally flatter hierarchies and institutionalised transparency mechanisms. Such a corporate culture facilitates direct and open communication and prevents organisational opacity. No doubt, this region has a strong reputation for ethical business practices, robust questioning culture, low level of financial misconduct and high levels of trust in public institutions.

The question posed above is open for debate and introspection. Meanwhile, investors, shareholders, particularly minority ones and other stakeholders in the companies continue to look up to IDs.  

The writer is a former bank executive and presently on the boards of public companies as independent director