The Hindu Business Line : Making independent directorships work

THE NON-EXECUTIVE COMPANY director (NED), independent of both the owner and the chief executive, is much in demand worldwide. The Securities and Exchange Board of India wants half the board of directors to be from this category, while the Company Law Reform Committee would prefer a third. The independent, non-employee director is now being seen as a remedy for the increased incidence of corporate wrongdoing, manipulation and cavalier treatment of the broader constituency of shareholders by powerful insiders. It is part of a larger goal of developing open and fair corporate governance. Whether the intended statute changes will succeed depends on how the peculiarities of the Indian situation are reconciled with the Anglo-Saxon corporate culture from which the Company Law derives.

First, the large, widely held joint stock company is still the exception; the rule is the "promoter group" corporate run by a family and identified with its members, whether or not they own the majority of shares. Second, curbing the unbridled powers of promoters seems to be the intent of the legislation. It would be unfortunate if the director's role is seen as an internal whistle-blower — part of a civil servant's system of checks and balances — rather than a facilitator of an orderly development of professional management at the board level. This approach is likely to be neither popular nor feasible to implement. Nor is it strictly relevant when there are other agencies to play the watchdog. For any firm in a competitive market, there would be undeniable merit in having access to experienced elders to provide disinterested advice and an external point of view. They can bring specialist knowledge and expertise, and open doors to influence networks. They can be sounding boards and mentors to the Chief Executives who plough a lonely furrow. At their best, they are expected, like the British monarchy, to counsel, to encourage and to warn. Above all, their value is in direct proportion to their detachment and objectivity. Their compensation must naturally be substantial but without being embarrassing.

Performing this function implies considerable understanding and keeping up with developments of the industry and its related history and background. Besides, sub-committees envisaged by recent legislation require hours of patient study of reports. It would be ridiculous, therefore, to expect anyone, especially those of advancing years, to do justice to more than a few corporations. If the Government is serious about the role of an independent director, such directorships must be treated as a separate category and the permissible maximum must be lowered to, say, six. In the end, corporate misconduct cannot be curbed by structure and statute alone. True stockholder capitalism and active boards of governance would evolve only when there is a truly public sector, of companies widely owned, despite their entrepreneurial origins, such as IBM or General Motors. Promoter families must then shed the proprietor mindset even if the neon sign on the building carries the family surname.

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