Independent boards for all agencies

Source: The post is based on the article “Independent boards for all agencies” published in “Business Standard” on 30th June 2023.

Syllabus: GS 3 – Indian Economy: Inclusive growth and issues arising from it.

News: In a recent speech, the governor of the Reserve Bank of India (RBI) highlighted the significance of independent board members for overseeing Indian banks. This emphasizes the need for government agencies and regulatory authorities to also have a majority of independent directors on their boards, just like private companies.

What are the principles of good organization design?

Good organization design aims to minimize the concentration of power and encourage the involvement of diverse perspectives and interests in decision-making. This leads to better decisions and reduces the likelihood of mistakes.

Instead of relying solely on individuals, effective organization design focuses on creating strong institutions which ensures consistent and high-performance outcomes over long periods of time.

What are the three big ideas on good governance for organisations?

1) Independence of outsiders on the board from the management and from controlling shareholders. 2) Independent directors should be in the majority to hold the inside directors accountable. 3) One of the independent directors should be the chairperson of the board. This will reduce the concentration of power and enhance the authority of independent directors in relation to the management.

These ideas are implemented through legislation such as the Companies Act and regulations enforced by the Securities and Exchange Board of India (SEBI), particularly for listed companies.

How are these ideas applicable to government organisations?

These concepts are equally applicable to government organisations and provide the framework through which the governance of all government organisations can be examined and improved.

An independent director in a government-controlled organization should not have any affiliation or involvement with the state apparatus in any capacity.

What is the present status of governance in government organisations?

Presently, different approaches are adopted by different organizations to address governance issues.

Most regulatory authorities have boards consisting mainly of whole-time members (WTMs) who tend to conform to the chairperson. This results in an excessive concentration of power which obstructs effective debates and decision-making.

Also, there is a lack of independent directors (part-time members or PTMs), which further weakens checks and balances within these boards.  Notable exceptions are the Telecom Regulatory Authority of India and the Pension Fund Regulatory and Development Authority.

In certain organizations, the power is centralized entirely in the chairperson, and the role of the board becomes insignificant.

What should be done?

A unified set of principles should be applied by creating a comprehensive law, like the Indian Financial Code. Such a law would include all financial agencies and standardize and improve governance practices across them.

In every organisation, the board must have oversight of organisation design and processes and have enough power to hold the management accountable.