What You Need to Know to Craft a Purposeful Board
As the murmur dies down and the curtain (hopefully) descends on all the Open AI drama, we take a deeper dive into the dynamics between directors, investors and founders, the history of corporate governance, and how Indian boards stack against US ones. We also look at some of the most revered boards across the world and offer an ultimate guide on board formation and management strategies.
December 8, 2023
Had Steve Jobs not been fired, he would have spent another 11 years at Apple, and we would have seen at least 10 new Apple products… an entire series of such threads resurfaced on the internet after the recent drama at Open AI. CEO firings are the climax of any corporate saga.
The board-focused governance model has always involved a complex web of relationships - between directors and investors, amongst directors themselves, and between directors and startup executive leadership. The unfolding of events at Open AI further reveals how precarious the position is, of even someone considered a once-in-a-generation founder.
What are the origins of corporate governance?
The Commissioner’s Report of 1811 led to the first law in the US authorising the formation of corporate boards.
The story goes back to New York’s Act of 1811 which says,
“the stock, property and concerns of such company shall be managed and conducted by trustees….. shall be elected at such time and place as shall be directed by the by laws of the said company”
This legislature was inspired by individual corporate charters such as the 1791 charter of the Bank of the United States (the first bank in the US), which had 25 directors appointed by their shareholders.
The Bank of the United States charter was also not unique but roughly mimicked the charter of The Society for Establishing Useful Manufactures in 1791, which had 13 directors elected by shareholders, managing the affairs. Ironically, this is also the world’s oldest example of the failure of outside directors to monitor management.
While corporate boards have historically and famously been premised on accountability, advisory is a more modern-day function that has evolved.
How are boards in India different from those in the US?
In the last 230+ years, these statutes have seen changes around the world including the general norm of corporate governance being “led by the board” to “under the supervision of the board.”
While we hear enough about the structure, laws, and limitations of the US board structure partly because any drama there is spread quite far on the Internet, there are major differences in Indian and US board structures.
- Unlike the US, Indian laws divide the board’s duties into two parts “duty to direct” and “duty to control.”
- In the US board size is based on company policy; whereas in India, the law demands percentile-based strength.
- The criteria for an independent director and the tenure regulations in India are notably stringent. The presence of a mandatory "shareholder's grievance committee" underscores the significant role shareholders play in governance.
And there returns the complex web of relationships between shareholders, directors and leadership. Here is a more detailed comparison of the US vs Indian corporate board laws.
Could an Open AI-like drama play out in an Indian company?
In cases of similar scale and prominence in India, arbitrator or court involvement typically occurs much earlier compared to in the United States. For instance, consider the Cyrus Mistry vs Tata board case.
The late Cyrus Mistry was a scion of the Shapoorji Pallonji Group. His appointment as Tata Group Chairman & subsequent ouster brought a 5-year board saga which even the SC refused to review.
What are some different types of boards?
- A passive board is a more traditionally observed structure in India’s tech companies. The board’s activity and participation are minimal and at the CEO’s discretion. The board has limited accountability. Its main job is ratifying management’s decisions.
- The Certifying Board emphasises credibility to shareholders and the importance of outside directors. The board certifies that the business is managed properly and that the CEO meets the board’s requirements. It also oversees an orderly succession process.
- The Engaged Board serves as the CEO’s partner. It provides insight, advice, and support on key decisions. It recognises its responsibility for overseeing CEO and company performance. The board conducts substantive discussions of key issues and actively defines its role and boundaries.
- The Intervening Board is common in a crisis. The board becomes deeply involved in making key decisions about the company and holds frequent, intense meetings.
- The Operating Board is the deepest level of ongoing board involvement. The board makes key decisions that management then implements. This model is common in early-stage start-ups whose top executives may have specialised expertise but lack broad management experience.
The key to better corporate governance lies in the working relationships between boards and managers, in the social dynamics of board interaction, and competence, integrity, and constructive involvement of individual directors.
That journey will probably be a long one. Opinions converge that most boards have been gentleman’s-club-era relics characterised by ceremony and conformity. It is also widely recognised that what a board must instead offer is seats of challenge and inquiry that add value without meddling, and make CEOs more effective but not all-powerful.
The high-performance board, like the high-performance team, is competent, coordinated, collegial, and focused on an unambiguous goal. Such entities do not simply evolve; they must be constructed to an exacting blueprint.
Here is the ultimate guide to building corporate boards.
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