The Hindu Business Line : The touchstone of independence

DOES a board packed with half its number with independent directors (IDs) contribute more to effective corporate governance than a board with lesser number?

The Irani Committee feels otherwise and has tried to please the promoters and majority shareholders by suggesting one-third of the board as independent directors would suffice. One would tend to agree with the panel that it is not in the number that valuable corporate governance and protection of minority shareholders are assured.

Even one director strong in principles and sound in knowledge can make all the difference. The key to successful running of the company for the benefit of all shareholders and stakeholders lies therefore in the choice of the right persons than in the number.

While the Irani panel rightly seeks to secure the `independence' by prohibiting persons and those with close relatives having significant pecuniary relationship with the company, one would have expected some guidelines on the qualifications, their sitting fee and perks.

These assume importance where the promoters and controlling shareholders of the company are not fair in dealings and honest with minority shareholders. It is another question whether the mere presence of IDs would prevent the gross abuse of their powers and destroying shareholder value as witnessed in the past.

There should be a peremptory change in the mode of selection of IDs with promoters and controlling shareholders having very little say in their choice.

The rationale is clear once we accept that these IDs are supposed to be the watchdogs keeping an eye on the doings of the board and the happenings in the company. While appointment of IDs by minority shareholders in the AGMs is spoken of as an option, it is not viable as the group is disparate with most members staying away from such meetings. The risk of a few ganging up and foisting someone on the board to create hassles cannot be precluded.

Can not the regulator, in association with representatives of the ICAI, ICSI, ICWAI, IITs IIMs, leading financial institutions, CII and chambers of commerce, entrust this job of preparing a panel of names for IDs to a special committee? The names can be chosen region-wise in three or four categories based on size — small, medium, big and very big. This should be done after proper screening from those who are willing and have the requisite background and experience in boards and above all the time to devote for the board meetings. The panel can be put on the SEBI Web site for possible objections about any name(s) from the public on their inclusion.

Often, the directors of big companies are chosen based more on the reputation, offices held and the contacts they have, consideration for favours received or brand equity that these names can fetch to gain investor confidence. Sadly, the bigger the name, the lesser is the time for monitoring the governance of the company. The panel for IDs need not include high-profile names. They will not serve the purpose. The promoters can choose through their board such elite persons of their choice for the remaining two-thirds or 50 per cent.

The sitting fees and other perks need not be uniform, but based on the size of the companies. The idea is that IDs should not be tempted by increases in sitting fees by the board and be in a position to build a snug and comfortable relationship with the promoters.

The term of IDs in a company should not be for more than three years and should not be available in the same or sister companies for appointment for six years thereafter.

The special committee of SEBI can forward a list of 10-15 names relevant to the background and size of the company for its board to select from. The regulator would ensure that no individual sits on the board as independent director in more than two or three companies so as not to dilute the intensive supervision he is supposed to exercise.

Investor and minority shareholder protection is best guaranteed by opting for diligent and sincere persons with condign knowledge about the ways companies work and who would not be swayed by the dictates of the promoters. They would provide an independent view based on their rich and varied experience to the board.

Every decision in the board would be tested on the touchstone of fair play and the best interests of the company (not the promoter/majority shareholder) and wherever they have dissented with the final decision taken, such matters would be reported to SEBI or included in the annual report.

They would ensure that the level of disclosures in financial reporting is high with no attempt to suppress vital facts. To secure this the Irani Committee has proposed greater powers to IDs. They can "call for any information in exercise of due diligence, force dissent to be recorded, and even review the company's legal compliance independently". IDs, like the promoters, would get actively involved in the running of the company.

Such increased powers naturally carry along with them accountability with possible penalties for failure to discharge their envisaged duties. Undoubtedly the audit committees would have IDs to closely monitor the work and findings.

The unwillingness of the panel members to work in some companies or frequent resignations of IDs from them is an alarm signal that all is not well with the companies for the regulator to take note of.

The authorities may also consider for mandatory inclusion in the annual reports of the companies a note from all the independent directors on the effectiveness in governance and areas where the IDs are not satisfied.

This will make them accountable to all the stakeholders and protect them to some extent at a later stage from possible investigation if things turn out bad and the promoters and majority shareholders stand accused of foul play.

It is not intended that IDs approach all issues with jaundiced eyes, of a possible collusion between promoters and majority shareholders to defraud the small investors. The idea is they should be alert and free, owing no allegiance to anyone save their conscience and act as facilitators for the growth of the company on sound lines in accordance with prevalent rules.

(The author is a Chennai-based freelance writer.)

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