Promoter vs Board Conflicts – How to Handle Them

Disagreements and conflicts cannot be wished away. Not all disagreements arise in the marketplace or with competitors. Some could emerge in the boardroom too. The articulation of differing viewpoints in a boardroom is both natural and desirable. Boards are composed of individuals from diverse backgrounds, and areas of expertise. Constructive disagreements are a sign of effective governance. Following a “yes-man” approach is often harmful for a company. A mere existence of conflict is not an area of concern. The real risk lies in failing to understand its complexity and not addressing it in timely and proactive manner.

Guided by law and regulations, Boards of listed companies are required to have an optimum balance of Executive Directors and Non-Executive Directors, with an emphasis being laid on Board independence. In practice, this structure significantly varies. Often the promoter family occupies the position of Chair of the Board, as also some other Board positions, which could lead to concentration of power with the promoter group. However, the mere presence of promoters on the Board is not a problem as long as the interests of the company are not compromised.

Understanding Promoter- Board Conflicts

The promoter’s role on the Board is important. It is typically associated with vision, ownership, control, long-term orientation, and deep familiarity with business. The promoter can perform this role as a non-executive owner, or as an executive, who in addition to being the owner, also runs the company. As long as he/she ensures that the Board functions independently, and the management has autonomy to perform, there is no issue. Conflict may arise when line between ownership and management is blurred, and when the promoter tries to disproportionately influence the Board and its processes, or when the promoter promotes his/her interest over that of the company.

Some of the significant reasons for conflicts

Some of the common triggers of potential conflicts include-

1. Lack of role clarity of the promoter – Separation of ownership and management is considered to be a good governance practice. However, some promoters exercise both the roles, while others perform only the role of owner.
2. Improper composition of Board or its committees – Non-compliance in Board composition, delays in filling vacant positions on the Board, classifying non-independent directors as independent directors can lead to improper Board functioning.
3. Cultural and ethical issues – Stance on zero tolerance policies is critical to the performance of the Board and the company.
4. Lack of proper tone at the top – Lack of open dialogue, independent thinking, transparency or suppression of dissent increases chances of unresolved tensions, and weakens accountability.
5. Opaque or improper related party transactions (RPTs) – Lack of proper processes and documentation relating to RPTs are often associated with conflicts.
6. Lack of succession planning – Absence of clarity or disagreement over leadership transitions can lead to issues on who will succeed in critical positions.
7. Dominance of promoters in all key deliberations – Excessive promoter dominance in every decision, with little respect for Board’s views, would not promote dialogue or meaningful engagement in the boardroom. Differences in business directions, expansion plans, growth strategy or risk appetite can also impair proper and timely decision making. Dominance in decision-making owing to shareholding patterns too can result in undue influence of the promoter.
8. Unjustified information asymmetry – Unequal access, delayed or inadequate information, and selective disclosures to non-promoters could restrict the Board or management’s ability to perform their role.

Promoter- Board conflicts do not arise because of a single issue or a one-time issue, but due to recurring practices which could undermine Board independence and weaken transparency.

Some steps to handle Promoter- Board conflicts

Impact of conflicts in the Board and on the company depends on how they are managed or addressed.

Some ways to proactively manage conflicts include-

1. Ensuring Board Independence – Merely appointing Independent Directors does not ensure true independence. Independence is strengthened when Independent Directors actively challenge management, and ask the right questions, without hesitation.
2. Committee Structure – Committees deep dive into Board matters, and it is important that their composition should be proper and balanced.
3. Role clarity – Management is responsible for running the day-to-day operations of the company, while the Board provides strategic directions and oversight. It is important that there is role clarity, and neither transgresses into the boundaries of the other. If the promoter has a non-executive role, he/she should be conscious of it, and should let the management run the company.
4. Flow of information and transparency – All Directors have a right to receive timely, correct and complete information. Practices such as selective disclosures, or incomplete documentation should be avoided.
5. Empowering Independent Directors – Independent Directors should be given proper induction at the time of joining. They should also be given proper and free access to documents and key personnel, so that they can perform to the best of their ability.
6. Proactive identification and resolution of any conflict – The Chairperson or Lead Independent Director (if any) should play a key and proactive role in identifying and addressing any issue, before it becomes too big. They have to set the right tone at the top.

Conclusion

Conflicts, if not managed and mitigated proactively, can escalate and create a deeper tension between promoter and the Board/ Directors. This would ultimately harm the company. Proper processes and role clarity will help in early detection, and, hopefully, resolution.

Nidhi Kapoor