The corporate world in India is clamouring for independent directors (IDs) for more than one reason. The Companies Act has made it mandatory for public unlisted companies to have a certain number of IDs, and it requires at least one-third of the board members of listed companies must be IDs. The other key reason for the demand for IDs is they cannot serve continuously for more than two terms of five years each.

While these norms came into force from 2014, the demand is more acute now as 10 years has just been completed and many IDs will need to leave the board on this condition alone.

With ‘corporate governance’ topping the agenda of companies, there is obviously greater demand for well-informed IDs. Also, there are many new corporates coming on board through the evolution of start-ups gaining business expansion — requiring, thereby, more IDs.

Clearly, the word ‘independent’ means someone not related or associated with the management or shareholders in any manner to affect his/her ‘independent thinking’ .

The role or job of an ID is to guard the interests of shareholders in an impartial manner and guide the management in proper diligent conduct of the business.

Quality matters

The qualities of IDs need to measure up to the expected output from them. Deep knowledge of business processes, fairness in conducting of business, basic knowledge of applicable laws of the land and high level of integrity are essential qualities.

How the IDs add value depends on their ‘capabilities’. There are many IDs who remain mute spectators and go with the flow of the board. This goes against the purpose of their role as IDs. That said, there are also many IDs who add immense value by bringing in their various skills to full play and ensure the corporate they belong to is held in high esteem in all aspects.

The demand-supply situation in the ID market is interestingly poised. There are over 5,800 companies listed in India and assuming an average of three directors per company the total demand is around 15,000 IDs. The latest estimates show there are over 1,000 IDs retiring in mid-2024 due to end of term. And, currently, there are already over 1,500 ID positions not filled in listed entities. Add to this the unlisted entities where ID is mandatory as per law. This comes to around 5,000 IDs. Thus, the overall demand for IDs is around 20,000.

Coming to ‘supply’ side, per Indian Institute of Corporate Affairs estimates, there are around 22,000 IDs (including 6,000+ women IDs).

The question is how many of them are good enough to be on the board as ID. The situation is more challenging when it comes to women IDs. The law mandates a certain number of women IDs in companies, which itself is difficult to fulfil as there is a huge supply shortage.

The need for high quality IDs will continue to grow at a much faster pace than GDP and there is a dire need to address the ‘supply’ side more than the ‘demand’ side.

While there are many forums and independent bodies working on increasing the availability of IDs, the lawmakers should also step in and find ways to manage the supply side.

There are so many compliance and governance areas that need to be covered these days. The knowledge of many IDs in these areas is limited. With many of the IDs in the fag end of their term, the motivation to learn is also limited.

While IDs have knowledge, experience and wisdom there is also a strong need to help corporates deliver superior results to all stakeholders through innovative strategic actions and flawless execution.

The writer, a former MD of Roca India, is an Independent Director on the boards of a few companies