The Hindu Business Line : Independent directors: Let’s not chase a chimera

The market watchdog, SEBI, wants to fine-tune the provisions in Clause 49 of the Standard Listing Agreement to make the role of independent directors more meaningful and less farcical. One of the changes proposed in the consultative paper issued for this purpose is minimum age of 21, lest innocent youngsters straight out of school and not expected or equipped to ask inconvenient questions are appointed in a hand washing spirit as is being done at present.

Role of whistleblower

At the risk of sounding cynical, it must be pointed out that world over, experience of the corporate world with regard to in-house whistleblowers is nothing to write home about. To be sure, the audit committee, which is a subset of the board of directors, mandated to be appointed by every listed company in India can be counted upon to focus upon matters impinging on finance and accounts with greater attention. That is about all.

It cannot be counted upon to perform the role of a whistleblower. Similarly, independent directors, beholden to the promoters cannot be expected to be the conscience-keepers of a company. In the US, the Enron and WorldCom fiascos happened right under the nose of audit committees and independent directors.

Uninterested director

An independent director, conceived as the one who is disinterested, more often than not, turns out to be an uninterested director as well. He has neither the inclination nor the incentive to lock horns with the hands-on promoter-directors.

Experience also shows that it is the promoter-directors who take active interest in the affairs of a company, which incidentally is also why family-controlled companies have done much better than the so-called professionally managed companies.

An independent director considers it a great honour to be on the board of assorted companies and does not bestir to meddle in the policy-making or in the nitty-gritty of project execution and general administration. His is thus an ornamental position. If SEBI wants to continue to repose its faith on the independent directors, the least it must do is to vest the power of their appointments with an impartial agency with no axe to grind. SEBI itself is eminently suited to discharge this role.

It can maintain a panel of distinguished economists, lawyers, accountants and other professionals and depute them to various companies on a rotational basis after making sure that they are not in any way related to the promoters and others in a position to call the shots in a company.

A parallel to draw inspiration

There is a parallel to draw inspiration from in this regard. The auditors of public sector companies are relatively more fearless and independent because they are not beholden to the board for their appointment — they are appointed by the C&AG on a rotational basis out of the panel of auditors maintained by it for this purpose.

The C&AG prescribes an elaborate checklist for the auditor to focus on. Similarly, SEBI too can draw the pointed attention of the independent directors thus appointed to areas considered to be crucial. And for performing this onerous duty, they must be amply rewarded — payment of sitting fees alone would not be sufficient. As a corollary to being the appointees of SEBI, the independent directors should be mandated to report to it just as auditors of public sector companies report to the C&AG.

One may wonder whether this would amount to ushering in a regime of dirigisme. But then the Government’s un-stated aim in packing boards with independent directors too is the same. Only the regime proposed herein would make the role of the independent directors real and meaningful though admittedly in the process casting them in an adversarial role willy-nilly. If taxpayers’ money involved in public sector companies justifies the proactive role of the C&AG and auditors, involvement of public money in private sector listed companies justifies the case for proactive role of independent directors. As a logical step forward, even the auditor of a private sector listed company ought to be appointed by a disinterested agency. SEBI then should maintain panels — of auditors and of independent directors. In short, unless independent directors and auditors are appointed by a dispassionate agency, it would be idle to expect them to be independent.

(The author is a Delhi-based chartered accountant.)

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