The Hindu Business Line : Illusion of independence

As far as language and intent go, the definition of independent directors and the delineation of their roles and responsibilities contained in the regulations and codes pertaining to corporate governance adopted by various countries are near-perfect. Clause 49 of the Listing Agreement governing companies in India has a long and comprehensive definition which bears recapitulation.

According to it, an independent director shall mean a nonexecutive director who, apart from receiving director's remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies; is not related to promoters or management at the board level or at one level below the board; has not been an executive of the company in the immediately preceding three financial years; is not a partner or an executive of the statutory audit firm or the internal audit firm that is associated with the company, and has not been a partner or an executive of any legal or consulting firm dealing with the company for the last three years; is not a supplier, service provider or customer of the company; and is not a substantial shareholder of the company, owning two per cent or more of the block of voting shares.

The New York Stock Exchange regulation prescribes that the family members of those appointed as independent directors should have no direct or indirect interest in, or contact with, the companies concerned.

Nothing has been left to chance in setting out the roles and responsibilities of independent directors either. As one corporate watcher puts it, they should be sound in judgment and have an inquiring mind. They should question intelligently, debate constructively, challenge rigorously, listen sensitively to the views of others, inside and outside the Board, and decide dispassionately.

NECESSARY REFORM

In general, they are required to contribute to, and constructively challenge, the development of company strategy; scrutinise management performance; satisfy themselves that financial information is accurate and ensure that robust risk management is in place. They should meet at least once a year without the chairman or executive directors; be prepared to attend AGMs and discuss issues relating to their roles (especially chairmen of committees); and have regular and close consultations with major shareholders to keep their ears to the ground.

Even clear-cut stipulations such as the above have failed to stop a number of companies in the US and elsewhere from going astray. Despite the presence of independent directors of the highest possible credentials on its board, Satyam Computer Services has been in the vortex of a maelstrom for shady transactions.

Studies in the US and the UK too have shown that the induction of independent directors has had no directly attributable impact on either profitability or quality of corporate performance.

The fact that the companies themselves make the selection and appointment of independent directors ab initio robs them of their independence, as a sense of obligation and loyalty to the promoters clouds their judgment and tends to take precedence over their duty to safeguard public interest. On the other hand, directors appointed to boards by investing or lending institutions are known to be more scrutinising. A necessary reform to make independent directors truly so is for the Government or the regulatory authority itself to appoint them so as to eliminate any scope for temptation or quid pro quo.

B. S. RAGHAVAN

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