MMA organised a discussion on the theme of the book “Inside the Boardroom – How Behaviour Trumps Rationality,” authored by Mr R Gopalakrishnan, Author; Corporate Advisor & Former Executive Director, Tata Sons Ltd. Mr Vijay Sankar, Chairman, The Sanmar Group and Mr Lakshminarayanan Duraiswamy, Hony Treasurer, MMA & Managing Director, Sundaram Home Finance Ltd were in conversation with the author.
Mr R Gopalakrishnan: We generally see only one side of a board and that side is the rules regulations. The other side is human behavior which manifests itself in everything. This does not apply only to boardroom of a company but also, it applies to clubs, gymkhanas and housing societies. The human motivations are not dissimilar. That’s the first point I want to make. Amos Tversky and Daniel Kahneman said twenty five years ago, that we are studying too much quantitative economics but there is a behavioral side economics and that gave birth to the whole science or art of behavioral economics. We are prising open the box of human behaviour in boardrooms. We hope that knowledge seeking professional institutions will take this further and build a body of knowledge on the subject.
Niyam, Niti and Niyat
In Sanskrit, we have words called niyam and niti. Niyam means rules. Niti means following the prescriptive, but there’s very little spoken on the niyat, which is the real intent. Somebody can set up a company aiming to become a unicorn in five years and that company will behave in a certain way. Somebody else may set up a company to do some larger good for humanity. I am not just referring to the Tatas. Recently, I met Mr Azim Premji and asked him, “When did it strike you that you must be philanthropic?” He said, “Within two years of my father’s passing away, I came back to India. To be honest, I didn’t think I should be philanthropic. I wanted to do Wipro for some other larger cause. It was very unclear to me what that larger cause was.” Today, his foundation is worth 240,000 crores. That’s quite a lot of achievement.
India needs more such businesses. We have very good entrepreneurs. A few of them maybe oddballs but the large majority are well intentioned good people. But what they lack is governance. It’s not the fault of the chairman or the promoter but it is the fault of everybody who has tried himself or herself as a director, including myself. I’ve been a director now for 37 years on about 25 companies. I’ve seen it in India, Sri Lanka, Middle East and England. Apart from the cultural differences, there are some commonalities.
The Prodromal Test
The second question that comes up is: Can we do something about the governance? We have defined what is called a Prodromal test. It is about how to interpret the advanced signals that you’re getting when you’re a director of a company. The behavior of the people around the table gives you an indication of how people’s minds are working. If you get a score of more than 12 out of 15, it means that’s a dangerous company. Below five is probably okay. I have applied this prodromal test to several institutions I have been associated with and where I was competent to grade. Whether my grading is right or wrong can be debated. I can tell you that it is like a rough instrument but it works. You can’t take every single number, extrapolate it and do correlation, regression analysis. But it works.
If we get a score of 13 out of 15 which is a danger signal, what do I do about it as an independent director? We have developed a 7D process which covers areas from discovery to departure, with measured steps in between. CG Power would not have been brought to book if the whistleblower weren’t the independent directors. Tata finance would not have come into the public domain if Ratan Tata had not blown the whistle on his own company.
We have also described a new concept called ‘the fly on the wall.’ The fly on the wall is an independent person who can hold a behavioral mirror to the face of the directors. I’ve done such an assignment for two companies. I cannot describe myself as having done a great job. But I think it helped a little bit. A mirror can’t make you more beautiful than you are. But it can tell you where you’re not beautiful. Then you can apply makeup or change your hairstyle or do whatever you have to do.
Mr Vijay Shankar: Should not the prodromal test be the first thing that an independent director should do?
Mr. Gopalakrishnan: Yes, but I don’t think they do. I can’t speak for all the independent directors. But for many people, it’s prestigious to be a director of a company. There’s nothing wrong with that. But then, after the scam has been uncovered, people say, ‘I could see something. The dark clouds were there.’ When the wind was cool and gusty and yet you failed to take your umbrella for your walk, what can be done?
Mr Lakshminarayanan: When there are early warning signals that you could see, is it also possible that a new director who’s has just joined the board is overawed by the rest of the personalities in the boardroom and chooses to remain quiet?
Mr Gopalakrishnan: It’s a possibility. All of us are human beings. This is not to cast aspersions on them. When I joined the board of Tata sons, the people who were sitting around the boardroom were Nani Palkivala, Ratan Tata and Darbari Seth…Do you think my voice was clear? But that’s not an excuse for you not to express a concern, if it has come to you. That distinction is very important.
We talk of several biases. A new director, especially a lone woman director, feels isolated. I’ll give you an example, where I did share my opinion and succeeded. Tata Play used to be Tata Sky. A proposal on the Tata Sons board came up that we would tie up with Murdoch and set up a joint venture. The proposal was that we will not put the Tata name on it. We will call it Sky. Everybody around the table said that the proposal looked good and that we should not put the Tata name on it. I come from branding background. I said this is going to 300 million TV sets in the country. If you don’t put Tata name on this, how will you brand Tata? Some debate happened. Luckily, in the Tata board, they were very open. If you see Tata Play at the bottom right hand corner of every DTH box, I think I had a little role in that. What I have learnt is that we must learn to disagree agreeably. To disagree agreeably is a skill. It’s more important than learning LODR and such other things.
I’m giving another anecdote which is in the public domain. Back in 2000 or 2001, there was a discussion whether we should go for CDMA technology or GSM Technology. The chairman was in favor of CDMA. I am not a telecom expert. After the debate is over, I came out and talked to one or of two my colleagues and sought their opinion on going for CDMA versus GSM. I understood that CDMA is supposed to be technologically more sophisticated, but not so widespread (like the Sanskrit language) and GSM is widespread (like the Hindi). I found the right time and did talk to the Chairman on the need to go for GSM but I did not succeed. I never said that we made the wrong decision and that’s why we were in a mess. When we got into a mess, we found ways to get out of it. You must discriminate between things that have an ethical overtone and things that are totally professional.
Mr Vijay Shankar: We have promoter-led companies. We need to change the regulations. The definition has to be changed and banks should not ask for personal guarantee of a promoter. It’s my view that the promoter concept is dead in India. We have non-promoter-led companies too. How is the governance different between these?
Mr Gopalakrishnan: No other country in the world has a concept of a promoter, other than India. We had the managing agency system and that was abolished around 1961. Then this concept of a promoter came, but it became a monster. The promoter thinks the company is his, which is rubbish. It’s not his company. I once pointed to the chairman of a cement company in Calcutta who openly said, “This is my company. I’m running this company and target to hand it over to my son and my son will do the same for his son.” I told him, “I beg to defer. If your son is competent, I have no problem. But it’s not your company. You’re only 61% and 39% somebody else.” The moment you take 1% of public money, it’s not your company.
Mr Lakshminarayanan: One of the biggest challenges that corporate India is dealing with is succession planning. It’s more so in promoter-led companies. Will 10 years be probably the right tenure for a CEO or should you leave it to the wisdom of the board? If there is a professional CEO who’s good enough to continue, should we relax the rules? What’s your view on this?
Mr Gopalakrishnan: It is a complex issue. I’m respectful of alternate views. But I can only express what I have found to be a good practice. You have to understand what happens to a guy who has been made a CEO. A perfectly normal guy who has advanced to the position of CEO or ED or VP, has some behavioral aberrations, like every human being. Over a period of time, he suffers brain damage. By brain damage, I mean that person loses empathy, the ability to listen to people. He loses reality. When he retires, just like losing the magnetic field, he becomes a nice, humble, sweet chap, whom you used to know 15 years ago.
None of us is free of it. This is not a commentary on other people. If you stay in that job too long, the brain damage becomes permanent. My experience and observation is that in the first five years, a new CEO is trying to find and understand his role. Things are a bit unfamiliar. He wants to be successful. The next five years, he wants to take some actions and leave his imprint in the company. After ten years, he starts to have declining increments. I’m certainly not in favor of legislation on the tenure but creating awareness is important.
Mr Vijay Shankar: The Companies Act 2013 and the SEBI (LODR) Regulations 2015 have led to improvement in corporate governance. Without them, I don’t think we would have seen the improvement and corporate governance standards that we have seen in India.
Mr Gopalakrishnan: You make a very valid point and I agree with you. I hope I didn’t give the impression that I’m against laws. In our old physics lesson, we learnt about a necessary condition but which is not sufficient. That’s my view with laws.
Mr Lakshminarayanan: How can you distinguish between corporate failures and corporate frauds?
Mr Gopalakrishnan: A failure can be the ancestor of a fraud. When there’s a genuine failure and if you’re willing to admit it’s a failure, then you don’t go to the next generation. But very often, leaders are not willing to admit a failure. To correct that failure, they do another one, which fails even bigger and sooner it becomes a fraud. We saw it in the case of Satyam. Admitting a failure is not a sign of weakness. We all make mistakes and you can’t have business and entrepreneurship without failure.
Mr Vijay Shankar: The institutional advisory service firms are getting more active in India. Any comments or thoughts on that, because I guess that brings a whole new dimension into how companies are run.
Mr Gopalakrishnan: It’s a good thing that we have domestic financial institutional advisory services. They are developing and the fact that a 2% shareholder can bring the whole company down is interesting. The board governs the company; the CEO runs the company; the chairman of the board manages the board. They are mutually accountable to each other and to institutional advisories or even financial institutions who ask relevant questions. But unfortunately, we have not matured and it is still work in process. I have seen institutional members of boards who have played a very deep and solid role and have high regard for them.
Insights from Q&A
Q: Could you share some practical strategies or tools that board members and executives can use to incorporate behavior insights into their decision making process?
Mr Gopalakrishnan: I don’t have a straight answer for that. I have been trying to prevail on the Institute of Directors and Company Secretaries and made presentations to them on the need to have a substantive module on boardroom behavior. I found a lot of wisdom and solace from the Puranas. There must be case studies on behaviours. There is a case study of an investment banker in New York, who at 45, had a three bedroom apartment opposite Central Park, a pretty wife and lovely children. His company, for some reason, thought he should go to an outbound leadership program and they go to Nepal to climb some mountain. On the way, he finds a Sadhu lying in the snow, naked and almost dying. He gets into a moral dilemma. ‘Should I stay back and help the Sadhu or should I carry on my mission?’ This case is being taught in Harvard.
You can have a debate on this for a long time. But it brings out the nuances. A lot of Westerners will say, “Oh. It’s human life. We can’t just ignore it.” But one Indian said, “Outside my house, every day, I find a lot of such people. I’ll never reach my office if I try to stop and help everybody.” You can see how the context has determined how people think about it. There are stories and cases that can be built up.
Q: In the startup world, people who provide funds wield disproportionate influence. What can we do to help these entrepreneurs who get pushed?
Mr Gopalakrishnan: I don’t know the answer. This does not apply only to startups but also it applies to grownups. We can sit and preach about what training we should give to the hedge fund or the Angel fund or the venture capital fund. But that would take us away from the goals of what is within our help. Just like a director has to be wise and do his due diligence before joining a company, an investor also must do the same. An investor knows that if he invests in ten companies, maybe three will come right, if he is lucky. Seven will go wrong. When you’re in the jungle, don’t expect to meet a gentle panther.
Q: Can you comment on women on boards and any specific advice for women directors?
Mr Gopalakrishnan: I don’t know if I have any intelligent comment to make on it. I genuinely believe I was also a great skeptic, 10 years ago. But over the years, I have found that women have a different way of looking at the same thing. You can get more women on your board, not just one because some law says it. Make them feel more self-assured. Men get very hostile when they have to do many things at the same time. Men work on mental maps while women work on mental compasses. The toughest job in the world is to be a mother and women do that effortlessly.
Q: How can we look at diversity in a broader senses-rather than men versus women?
A: When I went to Saudi Arabia as a chairman of the company for the first time in my career, I had the experience of 16 nationalities working in my company. There were English, Indians, French, Dutch and Arabs. I requested Unilever to sponsor me to a program in INSEAD in Paris on how to manage diversity. It taught me a lot of good lessons. But slicing and dicing diversity to infinitesimal components is self-destructive, as you might see what is going on in our public space right now. Diversity has to be in broad clusters.