Boardroom blues

| Updated on March 04, 2021

Reinforcing the role of independent directors shouldn’t raise compliance burden on companies

To prevent family-owned listed companies from short-changing minority shareholders, our regulators seem to be placing increasing faith in independent directors (IDs). SEBI made sweeping changes to its listing regulations in 2018 to enlarge the role, responsibilities and eligibility criteria for IDs. In 2019, the Ministry of Corporate Affairs prescribed compulsory registration and written exam requirements for IDs. SEBI’s new discussion paper last week appears to be a fresh attempt to reinforce the independence of IDs with more stringent rules for appointment and removal. Presently, IDs are recommended for appointment by the Nomination and Remuneration Committee (NRC) of the Board to be later ratified through an ordinary resolution. SEBI suggests replacing this with a dual approval process, where the NRC’s recommendation will need to be approved by a majority of a company’s minority shareholders in addition to being put through an ordinary resolution. Removal of IDs will need to go through the same process. To align ID interests with shareholders, it suggests the grant of long-vesting Employee Stock Options (ESOPs).

While these proposals are driven by good intent, some of them may be tripped by practical difficulties. Giving minority shareholders veto powers is aimed at thwarting promoters from anointing yes-men as IDs. But the problem is that retail shareholders are mostly apathetic to corporate voting exercises, while institutions are loath to vote against incumbent managements. For well-run companies backed by promoters without ill-intent, the suggested process for ID appointment will only raise the compliance burden. While it is important that minority shareholders do have a voice on corporate Boards, having too many non-executive directors can hamstring promoters with substantial skin-in-the-game. It is also unfair to expect IDs who occupy multiple Board seats across sectors to weigh in on everything from a company’s related party deals to mergers and takeovers. In fact, to encourage diligent candidates to apply to be IDs, regulators may need to consider narrowing the scope of ID responsibilities. Their statutory obligations must perhaps be restricted to checking governance infractions; participation in strategic decisions should be left to the ID’s discretion depending on sector expertise and qualifications.

To attract qualified executives to apply to be IDs, the compensation for the role does need to match its wide-ranging responsibilities. But whether ESOPs are the best way to go about this is moot, as they have been known to create perverse incentives for corporate executives to focus on the short term and even window-dress numbers to please markets. Instead, regulators can consider prescribing a slab-wise fee structure for IDs based on company size and complexity. They also need to devise ways to expand the limited pool of managers who are today willing to apply for ID positions.

Published on March 04, 2021

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