The Hindu Business Line : Independent directors

With listed companies being taken to task even for innocuous statements made in the media companies are justified in being cautious, which perhaps explains the delay in appointing the independent directors.

WITH the SEBI Chief insisting that the deadline for compliance with the requirement to appoint independent directors will not be extended beyond December 31, listed companies have to reconstitute their boards forthwith so that they are not in violation of the revised Clause 49 of the Listing Agreement.

In a majority of cases, the mere induction of independent directors may not also suffice — as the clause specifies their proportion to the overall board strength. The number of independent directors has to be at least 50 per cent if the company has an executive chairman, and not less than a third, where the chairman is a non-executive.

Also, at least 50 per cent of the board members should be non-executive directors. While the definition of the term "independent director" necessarily requires a director to be non-executive, all non-executive members cannot be considered independent directors — if they are related to the promoters or have a pecuniary relationship with the promoters, and so on.

As per the amended definition, the managements will also be required to relieve board incumbents who do not qualify as independent directors. If in reconstituting a board by appointing independent directors, without axing any of the existing directors, the total number of directors exceeds 12, then the approval of the Central Government, under Section 259 of the Companies Act, 1956, is required.

While there is merit in prescribing that the board of a listed company should be broad-based, it is baseless to specify a long list of what the directors should not be "tainted with" to be consideredindependent.

If full-time directors, who despite not being related to promoters/their associates and not holding any shares in the company, are considered interested directors under this Clause, then how can the independent directors, who can be paid a part of the profits as remuneration (apart from the sitting fees and the reimbursement of expenses incurred in connection with the meetings attended by them) for their time and effort as non-executive directors?

Does the receipt of such remuneration not affect their independence?

There is a view that corporates are reluctant to appoint independent directors although they were given nine months (the deadline for compliance was extended from March 31 to December 31) and that there is no dearth of eligible persons to be appointed as independent directors.

True, there are professionals and retired bureaucrats who may be keen on serving as independent directors. In fact, a separate Web site for the registration of candidates willing to be appointed independent directors has been launched with the patronage of a stock exchange, and the data base is accessible by listed companies.

It is not as if listed companies are reluctant to appoint these candidates as directors on their board. Only each has its own approach.Does the mere possession of a professional qualification and not being a stakeholder in a company make a person eligible to be appointed a director in a company?

A board discusses many sensitive issues. With Clause 49 making it mandatory for boards of listed companies to consider all important subjects, every director gets information on, and access to, sensitive/confidential information/data. Most companies, if not all, havetheir own established traditions and convictions. How far a new incumbent, possibly a total stranger to the management, will respect its ethos or gel with the rest of the board members, regardless of whether they are interested or independent, cannot be gauged from their profile filed with the agency that has undertaken to identify eligible independent directors. Boards of companies do consider a host of factors, in the interest of their companies, before deciding on a candidate.

With SEBI taking listed companies to task even for innocuous statements made in the media on the working/future plans for the company on the ground that such they amount to breach of the provisions of its Prohibition of Insiders Trading Regulations, companies are justified in being cautious, which perhaps explains the delay in appointing the independent directors.

It must be understood that the position of a director in a listed company is neither just honorary nor for the sake of complying with the requirements under the Listing Agreement. The person should be able to contribute to the interests of the company, posses a modern outlook, managerial capabilities and expertise in a field even if not necessarily in line with the company's interests.

There is also the possibility of delay in decision-making. Independent directors could question even genuine business proposals/decisions at board meetings, just to prove their status. Imagine a situation when the board with an equal number of interested and independent directors is divided on an issue. It is likely that independent directors will be overly cautious on supporting a proposal that they believe is not sound or is questionable and, therefore, veto it. They may also insist that the minutes record their dissent. This is not good for companies. Board members should work as a team. However, by creating a set of independent directors, the promoter/directors and full-time directors will be constantly under watch.

The requirement that the quorum for the meetings of the audit committee should be not less than two independent directors implies that the presence of interested directors will not be counted for the purpose of quorum and that they will not have any say in the matter. Are promoters, who spend their valuable time, energy and money, provide their personal guarantee where required and who consider the views of the other directors (who do not belong to the promoter category) before taking decisions, to be looked upon as a disreputable lot and a set of "outsiders" by independent directors who sit in judgment?

The provisions on independent directors and the audit committee should be reviewed so that possible rifts in the boards are avoided.

This can be achieved by introducing simple provisions in the Clause 49 requiring listed companies to have "broad-based" boards — as insisted upon by financial institutions while granting financial assistance to companies — and by shifting the roles and powers of the audit committee to the board itself with the direction that there should be a minimum number of "outside directors" (other than the promoters) at the board meetings.

With listed companies required to do extensive reporting and disclosures in financial statements and elsewhere, such simple measures should help the regulators achieve what is now intended through a complex, cumbersome regulation. It is in the best interest of the corporates and the investor community that the extant provisions on independent directors and audit committees are scrapped.

The proposed amendment to the Companies Act, introducing the concept of independent directors, should also consider these suggestions to make the provisions pragmatic, simple but effective.

(The author is with T. V. Sundram Iyengar & Sons Limited, Madurai. The views are personal and not those of his employer.)

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