An ongoing investigation into the financial scandal involving NMC, the biggest private provider of healthcare in the
The story behind the biggest scandal involving a
NMC was founded in 1975 by Dr. BR Shetty, an Indian entrepreneur who emigrated to the
Initially NMC was forced to admit fraud of
Corporate Governance practices come into question
Boards of Directors are intermediaries between the shareholders and management of a firm. Boards decision-making roles include monitoring and evaluating company's performance, hiring and firing the company's management, and nominating new Board members, just to name a few. Boards of Directors are considered trustees of investors interests and are required to have sense of good business judgement when executing their duties. Therefore, it is very important for companies to have the suitable Board members to protect the shareholders' investments.
NMC's Board Expertise and Skill Matrix (2018)
Note: This figure illustrates the skills and expertise of NMC's Independent Directors (INED) in 2018. All the data used in this figure is available in the CGLytics platform.
Understanding the skills set of NMC's previous Board
The figure above shows the expertise and skills of the Independent Directors (INEDs), who sat on the Board in 2018. Attention is drawn to NMC's INEDs lack of financial expertise.
It becomes clear therefore that the Board's lack of financial expertise and the Audit Committee Chairman's lack of financial knowledge must have played an important role in prohibiting the correct functionality of the Board that might have eventually led to the financial catastrophe of NMC.
Note: This table presents data for NMC's Board characteristics, which is collected by CGLytics.
Looking at the characteristics of NMC's Board, it is revealed that NMC's Board size in 2018 and 2019 was equal to 11. For 2018 and 2019, two of the Board members were joint chairs for both years, namely the founder who was considered Non-Executive Chair (dependent) and an Independent Non-Executive Chair, three members were Executive Directors and six were Non-Executive Directors, of whom only one is dependent while the rest are independent.
The average age of NMC's Board is close to 57 for both years. Gender diversity includes three women sitting on the Board in 2018 and two women in 2019. Between 2018-2019, most of the Board of Directors were non-nationals2 with a percentage equal to 73%. The average tenure of the Board is six years which reveals that the Board in both years were not particularly stale. Finally, 55% of NMC's Board (referring to all the members of the Board) were independent across both years. In addition to the dependence ration, the
What could have been the problem then?
Taking a closer look, an important fact comes to surface: NMC is headquartered in
Over the last decade, the increasing flow of capital around the world has forced many emerging economies to increase corporate governance in order to attract foreign funds. Moreover, many companies changed their board composition by adding more foreign directors in order to attract foreign capital, as foreign directors mitigate the agency problem between domestic and foreign shareholders in favor of the foreign investors.
Nationality of directors during 2018-2019
Note: The data used in this table is collected by CGLytics.
Observing NMC, the data indicates that 66.67% of its INEDs are foreigners, equating to two-thirds of the board. When the core sector of NMC, healthcare, does not typically rely on foreign sales, this generates questions. Is the high percentage of international INEDs merely there to serve the purpose of raising foreign capital? Raising foreign capital may have been achieved but at the same time weakened the Board's governance and monitoring of activities.
International directors sometime lack the local knowledge of regulations and requirements. Furthermore, the greater the distance the foreign directors are from the foreign company, the less monitoring pressure is put on executives, which could allow executives to act irrationally and not in the shareholders' best interests. Despite the fact that the dependency ratio of NMC's Board is 5% above the threshold of the
In legal systems that have a weaker legislation, companies' are expected to have more concentrated ownership. The top three institutional investors of NMC are foreign companies with spread ownership stakes. The addition of foreign directors have legitimated the company to the foreign investors, but the institutional investors may have overseen the fact that the company is based and operating in the
With the ongoing investigation into NMC, we cannot be certain as to the exact reasons that led to the current state. Nevertheless, we can say that a combination of bad decision-making and other factors relating to corporate governance played a significant role. The lack of financial expertise of the INEDs along with the wrong composition of the Audit Committee, plus the prioritization of attracting foreign capital via the
Using data and analytics found in the CGLytics software platform, companies, investors, proxy advisors and service providers efficiently analyse and spot governance risks and red flags in seconds.
1. Definition of financial expertise defined by CGlytics can be found here: https://audit.cglytics.com/documents/cg_guideline_expertise_20181123.pdf?ts=1575895304
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