The chimera of ‘independent' directors

S. Balakrishnan | Updated on March 12, 2018 Published on September 09, 2011

It is a matter of regret, that though the concept of independent director is a sine qua non for listed companies, it does not have a place either in the existing Companies Act. However the principle has got recognition in the new Companies Bill (the Bill). But no company director can be fully independent. Directors, especially non-executive directors (NEDs), including the category of independent directors, are liable to answer for all acts, real, alleged or imaginary, of commission and omission. Even for minor infringement of some obscure legislation, of which professionals themselves may well not be aware, they can be hauled up, harassed, arrested, prosecuted and imprisoned. With statutes increasing exponentially, they require all support and help. To Clause 49 of the Listing Agreement can be ascribed the credit for the introduction of the illusory concept of independent directors in India. Will anybody be an idealist that he will work for a company ‘free of cost'? The answer is a resounding No!

Where money is involved, one can forget independence!The Bill stipulates that an Independent Director shall not be entitled to any remuneration, other than sitting fee, reimbursement of expenses for participation in the Board and other meetings, and profit-related commission and stock options as may be approved by members – an instance of dangling the carrot!That independent directors will receive profit-related commission and stock options will definitely impair their independence.

CII argument

Readers will recall that the Chairman of Union Carbide was held responsible for the Bhopal gas tragedy and sentenced to imprisonment, creating a furore among commercial bigwigs and CII observing that “while as board members, independent and non-executive directors have the same legal duties and obligations as executive directors; however, because of their limited involvement in the day-to-day running of the company, it is undesirable for the law to expose them to personal liability”. One cannot agree fully with the views expressed by the CII. The view that “a limited immunity should be made available to an independent director against arrests and prosecution unless the same is authorised in writing by a magistrate not below the rank of a district judge”, seems more acceptable and logical.

The tenure of independent directors can be limited and an individual should not be counted as independent director for more than a specified number of companies. However, the problem is having a ‘ready supply' of people duly qualified and willing to act as independent directors. This problem will get more acute with the continuing increase in the registration of companies and their subsequent listing. Supply will definitely be less than demand. And this leads one to the point that the concept of independent directors is only a chimera!

Published on September 09, 2011
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