INDEPENDENT DIRECTORS – NOT JUST COMPLIANCE BUT A REQUIREMENT

Introduction

With India emerging as a prominent player in the global economy, there is an urgent need in the Indian Corporate Sector to upgrade the Corporate Governance System on par with the international norms. It has been widely observed that the Indian MNCs are way ahead than the PSUs in terms of quality of management; the PSUs, however, have an edge in terms of transparency of management.

Foreign Institutional Investors are investing heavily in India and it is for sure that the Corporate Sector in India has to inculcate a lot of professionalism in their functioning methodology. The Corporate Governance in the Indian Corporate Sector has to change rapidly in order to remain a strong force in the global economy.

Barring a few exceptions, the Indian Corporate Houses continue to function in the same conventional manner as they used to over a couple of decades ago. The quarterly Board Meetings have become a mandatory ritual, where trivial issues are discussed. It has also been observed that the Promoters prefer to appoint their acquaintances to the Board of Directors, in order to restrict the external interference in the management. Law is enforced to bring about a change and that very same Law is usually tweaked to ensure compliance as well as preference. Voluntary compliance to the regulations in strict sense is the only option to ensure a good Corporate Governance system.

Independent Director

The term "Independent Directors" became a part of the Indian Corporate dictionary after the publication of the Kumar Mangalam Birla Committee Report, which led to the introduction of Clause 49 in Listing Agreements.

The appointment of an Independent Director (Non-executive Directors) in the Indian Corporate Sector has become a matter of mere legal compliance. It is very common to have a retired bureaucrat, a celebrity like a film artist, a retired major general from the army, a retired judge from the High Court or the Supreme Court, etc. as the Independent Director on the Board. There is nothing wrong in this approach per se but more often than not these Independent Directors end up as a decoration on the Christmas tree.

Even today, in most of the companies, Independent Directors have no say in management issues. Over the years, “Manpower” played a key role in making or breaking a Corporate Structure. The Independent Director needs to have a prominent role in the management affairs of the Company and should be able to devote considerable amount of time to do the same rather than just remain a Namesake.

The rationale for requiring an Independent Director on the Board is to ensure a special check on the finances and functioning of the company particularly through the Audit Committee. The appointment of an Independent Director just to comply with the law defeats the complete rationale behind enforcing such a law.

The Legal Provisions do not define the required qualifications for a person to be appointed as an Independent Director, but rather specify grounds on which a person could be disqualified from being an Independent Director. The Law requires the Independent Directors to have discretion to think and act independently in the management affairs. The Law also mandates that the shareholders should elect an Independent Director.

In practice, however, the Promoters nominate or rather choose the candidates to be elected as an Independent Director. This transforms the “election” of an Independent Director to just “selection” of an Independent Director for the Shareholders point of view.

The ideal methodology to be employed in appointing an Independent Director should be based on certain values encompassing a proper mix of specialization in the areas of accounting and finance, technology relevant to the Company, Corporate Management, marketing and industry knowledge, etc. Perhaps, a skill matrix, which lists desirable competency versus those presently available on the Board, is useful in determining the gaps, which could be filled in by appointing a person with the required competencies.

It would be more appropriate that the Code of Conduct for Corporate Governance of a Company should specifically include the qualifications and attributes that the Company seeks of an Independent Director. A critical element for a person to be an Independent Director is being independent of the pressures exerted by the Management, in true sense and also as perceived by the general public.

Independent Director’s independence should include the will and ability in terms of knowledge and experience to ask the hard questions required to provide effective foresight in general, and especially in dealing with potential Conflict of Interests.

Conclusion

The appointment of truly Independent Director to the Board of Directors is not a panacea for all the evils. An Independent Director, however, if truly independent, can bring about transparency in management and can help avoid situations like the not so old Enron scandal on a global level and Global Trust Bank scandal back at home.

The Corporate Sector in India today, is largely governed with people’s money. A common man is also a shareholder in an Indian MNC today and most of the Equity Capital comes from the pockets of a common man in the society. In such a situation, the Indian economy cannot afford to witness another scandal of bankruptcy, where the root cause is corrupt management. This would affect the Indian society at a ground level, bringing the complete economy to its knees both in terms of finances as well as credibility in terms of global exposure.

The writing on the wall is very clear: unless Ethics are as important as Economics, unless Fair Play is crucial as Financial Success, unless Morals are as vital as Market Share, we cannot emerge as the global Corporate Leaders.