Faculty of law blogs / UNIVERSITY OF OXFORD

Captured Boards and Fractured Governance in a World of Cronyism: The Case of India

In a recent paper, I examine the largely emasculated role of corporate boards of directors in effectively discharging their fiduciary obligations of promoting and protecting the interests especially of absentee shareholders (ie, those not in control of the operations of the company). Although legislation and regulation in India, through the Companies Act and Listing covenants, especially after their reforms in 2013 and 2014 (see here), mandate stiff independence criteria to empower directors to better achieve the desired levels of protection of shareholder and other stakeholder interests, the structural design and composition processes of boards suffer from lethal vulnerabilities that inherently militate against due performance by non-management directors. That most boards and directors, barring some honourable exceptions, likely operate under sub-optimal independence levels is largely the result of inevitable cronyism associated with the recruitment, retention, remuneration and replacement of directors on company boards, albeit acting perfectly within the legal and regulatory framework.

On the other dimension of relationships between business and government, cronyism is not only widespread but is organised with generally accepted legitimacy through representative institutions like industry chambers and other consultative fora, besides of course covert dealings to seek and obtain fraudulent preference to specific businesses, business segments or even geographies within the State (and beyond in case of international business). While these practices are not exclusive to India (in fact, they operate in virtually every country, often through open and lawful ‘lobbying’ and ‘campaign funding’ as in the United States), exposés in the last decade or so dealing with allocation of public resources in India, like coalfields, spectrum, etc, leave one in no doubt as to the reach and extent of such practices (thankfully, a decline is noticeable during the last three years or so with a change of government in 2014). Fiscal and other measures which are the prerogative of the governments of the day are also instruments open to manipulation through the cronyism route.

The structural design of cronyism is thus quite elegant in seeking excess rents on the one hand (Up-Stream Cronyism), and expropriation by the business controllers (eg, by board capture) of more than a due share of such benefits, at the expense of other absentee shareholders (Down-Stream Cronyism).

Can corporate cronyism be eliminated and these deleterious consequences avoided? Given rational human behaviour that pursues self-interest, it would seem next to impossible to eliminate this malignancy. Can it be mitigated? Possibly yes, with some further empowerment of the institution of independent directors and certain enablers providing more teeth for due exercise of their independence; and greater transparency and restraint in government’s interface with business and business people. Is that likely any time soon? Doubtful, given the systemic benefits the privileged few in positions of power enjoy and the discretionary authority they wield to grant favours and largesse to whomever they wish to, the processes usually being shrouded in corporate and bureaucratic secrecy.

Given the concentrated share ownership which predominates the Indian corporate segment (and for that matter, most countries of the world with the exception of the US and the UK), the model of integrated up-stream-down-stream cronyism with reference to the governance of listed corporations may offer some help both for regulators and independent directors in India and elsewhere.

This paper was presented at the XI International Conference on Public Policy and Management held at the Indian Institute of Management Bangalore on 8-10'August 2016.

Bala N. Balasubramanian is an Adjunct Professor at the Indian Institute of Management Ahmedabad.


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