New Delhi, May 7 -- Markets reward credibility over structure, making board track records-not titles-the true measure of governance effectiveness
Institutional investors place significant emphasis on governance mechanisms, including detailed assessments of board dynamics. Although regulators advocate separating the roles of Chair and CEO as a 'best practice', the market often remains indifferent to this dual structure, focusing instead on an individual's credibility and track record on the board.
The choice of chairperson frequently signals the governance culture shaped by promoters. According to Resource Dependency Theory, firms seek expert board members for prestige, technical skills, or organisational fit, but such appointments also reflect specific strategic priorities. For retail investors, the chairman plays a critical role as the primary protector of minority shareholders' interests and a cornerstone for building long-term trust. The Chair must uphold the principles of fairness and justice. Fairness ensures equal treatment for all shareholders, regardless of status, while justice ensures that the board's collective expertise-'board capital'-is effectively deployed to create sustained economic value. This depends on how well the Chair balance board involvement with management oversight.
Since minority shareholders, especially retail shareholders, often lack transparency into how their capital is utilised, the board Chair and independent directors serve as vital links, enforcing ethical standards and fostering a culture of fairness. Over time, fair treatment of retail investors adds a trust premium to the company's share price-something far easier to maintain than to rebuild once lost.
An unexplained change in the tenure of the Chair or any director, particularly on ethical grounds, damages trust and undermines fairness, reflecting a serious failure of fiduciary duty.
The board acts as the company's steering body, providing strategic guidance while overseeing management. However, an independent board that becomes overly involved in day-to-day management can be counterproductive. Frequent meetings may signal instability or weak management rather than strong governance. This can indicate overreach into executive responsibilities, a lack of trust between management and the board, or organisational complexity that may not serve minority shareholders.
At the same time, there are numerous instances where independent directors fail to advocate for minority shareholders and instead follow management's lead. This persistent gap highlights the need for comprehensive regulatory reform. Since true independence is behavioural rather than merely legal, regulators should adopt a strict, merit-based pre-approval process for appointing independent directors. Appointments should be driven by specialised knowledge or specific resource needs, not just compliance. Boards must view independence as a competitive advantage rather than a regulatory obligation.
To enhance transparency, all departures should include a statutory explanation from the outgoing directors. Further, replacing per-meeting fees or capped profit-related commissions with a UK-style fixed retainer could better align incentives and encourage directors to safeguard minority interests.
Regardless of the approach, a comprehensive overhaul of the regulatory framework is urgently required.
NOTE: This article is authored by SPJIMR - Avinash Ghalke & Saibal Ghosh. No TechCircle Journalist was involved in the creation/production of this content
Published by HT Digital Content Services with permission from TechCircle.