Corporate governance has to improve in Indian companies, says Kalpana Unadkat, Partner, Khaitan & Co, a leading law firm. Although many of the well-intentioned changes in the law have been reduced to a mockery, Kalpana reiterates the need to keep trying to improve standards and ensure better governance. In the backdrop of the recommendations of the Kotak Committee on corporate governance, she has plenty of forthright advice for independent directors who have been given a key role in protecting the interests of all stakeholders. Edited excerpts:

How do you ensure independence of directors?

When your whole income depends on the pay cheque from that position, then there is always a question mark about whether you are truly independent.

If you did not have that cheque, how would you behave? That is the test of independence.

Is there a systemic solution possible? Can regulators appoint them or do it through a separate commission/ panel that appoints independent directors?

Unfortunately, in the majority of Indian companies, typically promoter-driven companies or those with controlling shareholders, independent directors are appointed by word of mouth or reference — say, a friend’s friend is appointed. There are very few companies who say, let’s look for external candidates. Ideally, the nominations and remuneration committee of the board is required to see this. In the real world, this doesn’t happen.

There are agencies, even an institute of directors who have a database. But only a few companies go to these agencies.

Can institutional shareholders start the process by nominating independent directors to boards where they have significant stakes?

Independent directors need to start thinking independently, irrespective of who appoints them. You are wearing a hat, where your job is to protect the company and all its stakeholders — employees, creditors, environment, etc — not just shareholders. The law now expects you to behave in the interests of all ‘stakeholders’.

What are the main challenges for independent directors?

Look at the duties and liabilities of independent directors. They are huge. But their pay cheque is still peanuts. Many companies send the board meeting agenda papers just before the meeting. How are you going to go through all that and decide on the pros and cons?

Also, in most board meetings you will see an item on the agenda — ‘any other business item’. The number of things that come up under the head, the directors have no clue. When I am asked for advice in many situations, I tell directors that if the matter is critical and there is inadequate information, then ask for time and another meeting. Don’t take the decision then.

Will separate meetings of independent directors (as recommended) help?

Are you meeting to tick the box? What gets discussed there is more important. Technically, even a company secretary should not attend the meeting. No one from the company should attend that meeting. Otherwise how will you talk freely? There is a recommendation for independent directors to meet separately. They should start taking their role seriously.

What should independent directors do?

They should act in the interests of the company and all stakeholders, not just shareholders. If, for instance, at a board meeting there is a proposal to lay off employees — which may be profitable in the short term — you should look at the long term. The code of conduct and SEBI rules expect that you look at the long term. That is what governance is all about.

What happens if there is a major disagreement by independent directors? Should they resign?

They should not resign. They should record their dissent. It is okay to be overruled. The only problem is people don’t do it. They are afraid of being the ‘bad guys’. My advice would be to get together with other independent directors on the board and discuss with them, and come to a pragmatic view.

When independent directors resign, they merely say they did it for ‘personal reasons’. Now they are required to give ‘detailed reasons’. Will that make a difference?

That is the reality. And there are anomalies. When an independent director resigns he or she is required to give detailed reasons. And yet, if you remove a director, you are not required to give a reason, which is ridiculous. Companies should give a reason. Secondly, removal of a director is through an ordinary resolution. Should it not be through a special resolution, requiring three-fourths majority?

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