The Hindu Business Line : Independent directors, key to corporate governance

Paucity of "qualified/trained independent directors" — an improbable argument
Enough talent with the right professional background, attitude and aptitude available
It is all about private gains for control
How relevant is the Anglo-Saxon concept for Indian corporates?
Institution of independent directors needs to be strengthened

HAVING successfully stalled for months, the introduction of the new norms on the appointment of independent directors, the effort now appears to be to dump the concept entirely.

Besides, adducing a host of trite arguments, the game plan also seems to involve playing the Securities and Exchange Board of India (SEBI) and the Ministry of Company Affairs (MCA) against each other in a new round of turf battle.

If the institution of independent directors were to be stillborn, it would be a setback to the fledgling corporate governance movement and also to the credibility of SEBI, which has done more than any other institution to improve the practices of the corporate sector.

Consider the arguments against the introduction of norms proposing a minimum number of independent directors on company boards.

The most ridiculous is that there is a paucity of "qualified/trained independent directors", and hence any norm prescribing a certain minimum proportion of independent directors would be inappropriate. Without in any way underestimating the importance of training or the sudden requirement of a large number, this argument is an insult to the intelligentsia of a country of a billion people.

One is reminded of the rather trenchant observation by a judge of the Madras High Court in another context: "... I am unable to persuade myself that (the country) is so destitute of talent as to be unable to furnish..."

None of the proponents of the "paucity argument" — it is not surprising that most of them happened to be industry associations — may be willing to explain how and why youngsters, in their 20s are appointed to company boards and to other senior positions with executive responsibilities by mere reason of birth into promoter families. Similarly, we see many civil servants, past and present, being appointed to the boards of the public and even private sector companies.

And not all of them are fully equipped to appreciate, let alone contribute to, say, a board debate on shareholder value implications of alternative strategic initiatives.

The point is, there is enough talent with the right professional background, attitude and aptitude, though it may take a few weeks or months, for anyone to develop reasonable domain expertise relevant to a company and adequate appreciation of the role expected of a board member. Another argument, floated lately, questions even the relevance of the concept of an independent director with its Anglo-Saxon origin to the Indian milieu.

Since most companies in India are promoter-controlled and promoter-managed — with the largest shareholders also holding managerial reins — the agency problem due to misalignment of interest between managers and a fragmented investor base would not arise in India, so the argument goes.

Hence, the so-called independent directors are not required to play the same role in Indian company boards, that of restraining the insider/management directors and pushing them towards shareholder value maximising decisions.

A columnist in a financial daily even argued that, "An outside director may actually be obstructive or even harmful, more so an independent director who usually attends a few meetings a year and professes expertise to give directions on formulating policies of the company."

Though the ownership structure of Indian companies should, ipso facto, eliminate agency conflicts, decades-long experience points to an even more serious problem — self-seeking behaviour and pursuit of private gains of control. How else can one explain the phenomenon of promoter-run companies falling sick by the day, even as the promoters prosper?

Obviously, all the value destruction has been forced, perhaps to a great extent by the lenders, on the non-promoter shareholders and even on the employees. Indian company managements, with exceptions, have made an art of self-dealing, self-aggrandisement, at the cost of the companies they control, and at the cost of non-promoter stakeholders, through a variety of means, such as purchases, sales and diversification. Even the raging Reliance sibling spat was all about the private gains of control. For weeks the promoters did not seem concerned about the continuing slide in the prices of shares of the Reliance group companies, thus negating the theory that with a 40-odd per cent promoter holding, the promoters' interest would be in complete alignment with that of the other shareholders.

It is possible that independent directors also may not either be willing or able to exert a sobering or restraining influence, as once again, the recent corporate episodes underscore.

The important point is that far from declaring that independent directors are redundant, India needs to strengthen the institution of independent directors so that they can actually play an effective role, not expected of them in the past. The few reported instances of the effective role played by the independent directors in handling delicate corporate situations clearly underscore the importance of this emerging institution. In many of the cases, they were able to play an effective role only because they were in sufficiently large numbers.

Thus it is important that there are a sufficient number of outside directors on company boards, enough to have an influence. It is equally important who can be legitimately and credibly classified an "independent director".

A person who has worked for decades in a senior management position in a group company re-cast as an independent director of the company on his retirement, most certainly would not be a credible choice.

Whether the number of independent directors should constitute up to one half of the board in certain circumstances (such as having single Chairman-cum-CEO position) can still be a matter of debate, though importance of having a sufficiently large number is not.

The attack on the SEBI initiative towards independence of the board with specious supply- and demand-side arguments should not be allowed to succeed. In fact, the extent of the gathering opposition itself is a measure of vested interests whose wish it is to preserve the board's character as a closed club of friends and yes-men.

This argument should be used for pressing ahead with the proposed reforms in the board structure.

(The author is a Professor at the Indian Institute of Management, Ahmedabad.)

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