Clipped from: https://www.financialexpress.com/opinion/ensuring-true-independence/3022745/
Independent directors can’t be expected to fulfil their mandate meaningfully when they serve on multiple boards within a promoter group. The need is to limit board seats to one per promoter group for each independent director,
Investors, especially the global and institutional, have increased their expectations of companies with respect to their governance practices. (Representative image)
By Shailesh Haribhakti and Srinath Sridharan
The number of listed companies can be expected to double from the current level by 2030, creating a human resources need for corporate governance. The current number of eligible independent directors exceeds 15,000. The efforts of ministry of corporate affairs, and various other entities such as the Institute of Directors and industry associations will ensure higher count and quality.
The markets regulator, the Securities and Exchange Board of India, mandates the minimum acceptable standards of corporate governance (CG) that listed entities should have. Corporate governance essentially is the art of exercising ‘sakshi chaitanya’—being a conscious witness. Effectively, an independent director must ensure fairness and transparency related to the interactions between all shareholders, employees, promoters, investors and other stakeholders.
Also read: Blow to debt MFs
Bulk of the contemporary Indian CG regulations emanated from the 2017 SEBI Committee on corporate governance, chaired by Uday Kotak. The committee addressed issues of independence of the independent directors, their active participation in functioning of the company, improving overall disclosures, board committees and frequency of meetings, and the effectiveness of board practices to increase the robustness of governance.
Investors, especially the global and institutional, have increased their expectations of companies with respect to their governance practices. It reflects in the way they engage & stay invested with these companies.
The functioning of independent directors, as intended by the spirit of the regulations, is essential for a good corporate governance framework. Independent directors are essential for minority rights protection, balancing the conflicting interests of various stakeholders and bringing an objective view to the evaluation of the performance of the board and management.
To be effective, boards must take steps to ensure that the promoters and executives of the entity cannot exercise undue control over the governance and supervision activities. The larger worry is how does sitting on boards of multiple entities of a promoter impact the independence of an independent director.
The test of independence is that the independent directors should not be connected to a director, chief executive, or substantial shareowner of an entity. This is based on the idea that persons with such links to insiders are more likely to make decisions on the basis of those links or relationships rather than on what is best for all the stakeholders, especially the non-promoters. If this is applied in spirit, isn’t the independence of independent directors compromised if they sit on more than one listed entity board of the same promoter group?
A material relationship is a relationship that can interfere with the exercise of a director’s independent judgment. While on individual boards, these independent directors are compliant with the financially-not-dependent clause, sitting on multiple boards (both listed and unlisted) of the same promoter creates concerns of not just material dependence, but also a sense of gratefulness for the remuneration and the social standing. Several of the independent directors who sit on multiple boards of a promoter group expose themselves to the accusation of compromised independence.
A fiercely independent voice and exercise of judgement are now expected from independent directors. They are also expected to bring objectivity to discussions on the boards and in assessing the performance of management and the board. Sitting on multiple boards of the promoter can limit such objectivity.
Also read: Can happiness be bought?
Corporate India talking about the shortage of independent directors is a flawed narrative. Unless the entities are shy of saying that they want independent directors whom they are actually familiar with! That puts the concept of independence in chaos. There are sufficient number of independent directors available for the Indian boards, but are there takers? For example, the need for top listed entities (by market cap) to have at least one independent woman director have exactly that—most of them have just one woman director. It just addresses what regulations want, and not the spirit of intent !
The Indian business ecosystem has been largely promoter-dominated. Most of the large listed entities have promoters firmly in the saddle, including in executive roles. Their influence in policy is undoubtedly firm. Recollect how the industry lobbied to get the SEBI regulation of mandatorily splitting the chairman and MD roles to become a voluntary condition.
Independent directors must ask questions to the promoters and professional managers, however uncomfortable those are. But then, the Indian ecosystem makes it difficult. No doubt, many independent directors have bravely faced single board terms or even truncated terms.
‘Tough/troublesome/non-manageable ID’ is the moniker given to them, and a hotlist of such names quickly do the circuit.
That’s exactly why Sebi should insist that the true independence of independent directors cannot be only in regulatory sense, but be in spirit. Hence the urgent need to limit the number of boards that an independent director can sit on, to just one per promoter group.
Haribhakti is an independent director on many corporate boards, and Sridharan is an author and corporate advisor