The Hindu Business Line : Can independent directors help improve corporate governance?

The Securities and Exchange Board of India (SEBI), stock exchanges, the Central and State governments, regulatory authorities, corporates and professionals swear by the mantra of corporate governance (CG). The Information and Broadcasting Minster has gone on record saying that this concept is soon to be extended to Central public sector undertakings. The guidelines in this respect, mostly adopted from Clause 49 of the listing agreement, places emphasis on the institution of independent directors — the company shall have an optimum combination of executive and non-executive directors (NEDs), with not less than 50 per cent of the board comprising of NEDs. There is a plethora, and sometimes confusing, views on CG. However, the one propounded by the eminent economist, Dr C. Rangarajan, is the best: "CG may be said to include the policies and procedures adopted by a company in achieving its objectives in relation to its shareholders, employees, customers and suppliers, regulatory authorities and community at large."

Who is an independent director?

Clause 49 explains independent directors to mean those who, apart from receiving directors' remuneration, would not have any other material pecuniary relationship or transaction with the company, its promoters, its management, or its subsidiaries, which in the judgement of the board, may affect the independence of judgement of the director.

It is further enjoined that he should not be related to promoters, decision-making authorities in the government, or persons occupying management positions at the board level or one level below the board. He should not have been an executive of the company in the immediately preceding three years; a partner or an executive during the preceding three years of any (a) statutory or internal audit firm associated with the company and (b) legal or consulting firms that have a material association with the company; is not a material supplier, service provider or customer or lesser or lessee of the company which may effect the independence of the director; is not a substantial shareholder of the company holding 2 per cent or more of the block of voting shares. The negatives are daunting and it is to the credit of India Inc. that it has been able to locate and appoint independent directors as per the norms in Clause 49. However, does it meet the criterion of good corporate governance?

The answer is an emphatic `no'. Unless directors have stake in the company, and that too a really significant one such as monetary involvement, it will be naïve to assume that they would be allowed to assert their independence. After all, NEDs do get attractive remuneration, not to boast of a good standing in the commercial world, and they would not jeopardise this opportunity by being too assertive or independent. Also, only directors with real involvement will take active interest in the affairs of the company and contribute to its obligations to shareholders, employees, customers, suppliers, etc.

Clause 49 says that the term `relatives' has to have the same meaning as assigned to it in the Companies Act. Twenty-two categories of relatives are listed in this Act, and is it possible, especially with the present proclivity for nuclear families, to identify and locate all such relatives? It is a matter for speculation why the Act includes `step-mother' in the list against `mother' but excludes `step-father' in the list against `father'.

Certification stipulation

More absurd is the stipulation that the auditors of a company have to certify on the compliance or otherwise of the conditions of CG as stipulated in Clause 49. Auditors are adept in sidestepping an issue without offending either the statutory authorities or their clients. A typical certificate with the blessings of the Institute of Chartered Accountants of India is: "The compliance of conditions of CG is the responsibility of the management. Our examination was limited to procedures and implementations thereof, adopted by the company for ensuring the compliance of the conditions of CG. It is neither an audit nor an expression of opinion on the financial statements of the company... We further state that such compliance is neither an assurance as to the future viability of the company nor the efficiency or effectiveness with which the management has conducted the affairs of the company." This may be taken as the opinion of ICAI on the necessity and usefulness of the institution of independent directors.

This is a clear indictment of SEBI's insistence for inclusion of Clause 49 in the listing agreement. The concept is utopian and not an effective management tool. It may be recalled that one of the compelling factors for the inclusion of this clause was the insistence of FIIs for such a stipulation in the listing agreement.

(The author is Chennai-based company secretary.)

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