How CEOs Subvert Boards

It is not often that the failure of a board of directors spills so openly into the public domain. But the ICICI board under the inept leadership of its Chairman, M.K. Sharma, has managed to make themselves the poster child for poor corporate governance in India. It has sullied the reputation of everyone associated with it, the Chairman, the CEO, the independent directors, and the government nominee directors.

ICICI Follows Infosys & Tata Board Battles

In the other recent board battles in India, most famously at Infosys and Tata, at least there were some heroes to emerge from a corporate governance perspective such as R. Seshasayee or Nusli Wadia. If the chairman, CEO, or the members of the board of ICICI continue after this fiasco, it indicates that even “shame” as a control mechanism has limited efficacy in the country.

Let us distinguish between promoter and non-promoter led (diversified stockholding with no controlling shareholder) companies for the purposes of corporate governance. The problem of corporate governance in promoter led companies is that the board kowtows to the promoter as the “independent” directors owe their positions to these promoters. As promoters can vote on independent directors, and minority shareholders infrequently exercise their voting rights, even with a relatively small shareholding, the promoter is effectively appointing the independent directors.

If an independent director, such as a Nusli Wadia, dares to disagree with the promoter, he or she is immediately sacked. This has chilling effect on dissent by independent directors. The promoter is all powerful and minority interests are trampled upon at will. The informal check in such cases is only the benevolence of the promoters, as I have previously noted, if they need to return to the equity markets. The savvier promoters, who take a long view, and are thus protective of their reputation vis-à-vis minority shareholders. But, as in any feudal system, the minions are at the mercy of the ruler.

In non-promoter led companies, one worries about the agency problem, where the managers may not align their interests with the shareholders. Without a promoter to oversee their behaviour, the professionals running the firm can enrich themselves at the expense of the shareholders. It is why in the USA, where such firms are ubiquitous, a separation is sought between the chairman and CEO positions. Since a powerful Chairman acts as a check on the CEO, at least on the boards outside India that I have served on, there is often a healthy tension between them. The worry in non-promoter companies is that an all-powerful CEO captures the board and subverts any effective oversight.

How CEOs Capture Boards

Over the years I have observed powerful CEOs deploy various mechanisms to make their boards and Chairman subservient. I will leave the readers to make their own judgment as to which of these were in play at ICICI as the board lost all control and abdicated its responsibilities.

First, is the problem of the “superstar” CEOs, who through a combination of past performance, charisma, and crafty PR management have created an aura of a dominant personality. The board in the face of this CEO is rendered ineffective in its monitoring role. The unconscious story line that plays out on the board: “Who are we to question a visionary like Ratan Tata, Narayan Murthy, or Chanda Kochhar?”

Second, as the same individuals serve on multiple boards, they have limited time to really understand and investigate the true situation in the firm as well as inadequate industry specific knowledge. As a result, independent directors suffer from “information capture”. Directors overwhelmingly are dependent on the information that the CEO chooses to provide or conceal. Consequently, directors end up monitoring the actions of the management through the “filtered glasses” provided by the same executives.

Third, and this is by no means an exhaustive list, CEOs effectively make directors complicit though various monetary and non-monetary benefits. The financial incentives for directors such as compensation and bonus recommendations by the CEO are well known. Academic research has documented that excess director compensation lowers monitoring of CEOs, reduces CEO turnover-performance sensitivity, and is an indicator of board entrenchment. Overcompensated directors provide CEOs with additional immunity and job security. Furthermore, excess compensation of directors is positively related to CEO total compensation providing evidence of cronyism between CEOs and directors.

The numerous non-monetary benefits operate under a veil. These include jobs at company or related firms for relatives of the directors, overseas trips to presumably understand far flung operations and investigate opportunities, But, most importantly in among highly interconnected elites is the need to maintain social capital. That is to continue membership in the “club”.


In light of the above, it should not be surprising that the instinctive reaction of the board is to protect the CEO. In a sense they are protecting themselves. The ICICI board reiterated their support of the CEO immediately as this story of potential misdeeds by Chanda Kochhar broke. Similarly, despite the Central Bureau of Investigations (CBI) raiding the offices of R. Venkataramanan, the managing trustee of Tata Trusts, him being named in the FIR filed by the CBI, as well as internal emails by Venkat providing evidence of engaging in lobbying to get the 5/20 rule for airlines removed, the Tata Trusts reaffirmed their complete trust in and continued support for the managing trustee (equivalent of a CEO).

Just as at ICICI, the independent inquiry that should have been the appropriate response by the Tata Trust board will happen only when there is no option because of a public hue and cry. The ICICI and the Tata Trust boards, from the corporate governance lens, have thus become the laughing stock when these cases are presented in any management classroom, and perhaps even in the press.

From a strict shareholder (minority shareholders in case of promoter led companies) perspective, Indian boards of directors are failing. They are not exercising the necessary due diligence and loyalty to shareholders by maintaining an intense oversight of powerful CEOs and promoters. The ICICI and Tata boards epitomize this with respect to non-promoter and promoter companies.

At Infosys, the board showed more backbone and attempted to resist the pressures before eventually caving in. This is not a good omen for corporate governance in India. My contention is, as I have made elsewhere, that the more laws and regulations we impose on the boards, the more ability we provide for them to engage in symbolic governance towards external stakeholders. These box-ticking exercises provide a fig leaf to engage is less, not more, robust corporate governance.

This article first appeared on 25 June 2018 at



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One Comment Add yours

  1. atulseye says:

    Every word you said was true. Promoter driven organisations suffer from promoter hubris and are often close to ideas. Look at PE invested companies. They are dealing with the promoters and despite pushback on numerous points, they give in often resulting into low levels of governance . I am yet to see PE invested companies bringing about governance change except for where the promoter wants such a change.

    Independent directors are, as mentioned in another blog of mine, ineffective in both promotor driven or management driven companies as they are mere dummies at the mercy of promoter or management in lost of the cases.
    Thanks for your wonderful post. Well appreciated.


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