Independent directors: Coping with regulation, waiting for resurrection

There’s not an iota of doubt that the Companies Act, 2013 has sought to fortify the four walls of corporate governance by reinforcing the role of independent directors through explicit provisions. Thanks to the new act, board meetings have now attained a sense of purpose towards safeguarding the larger interests of shareholders.

On the other hand, corporate audits have now become extra-vigilant about internal controls, verifications and validations especially in the suspect zone of related-party transactions. There have been a few instances where upright independent directors have stood their ground on thorny issues like conflict of interest. In a heartening move, the new statute has also tried its best to limit the liability of their thankless job by holding them responsible only for wrongdoings stemming from their personal carelessness or collusion.

But while the new regulation has created an environment conducive to impartial probity, the sheer expanse of the statutory requirements is likely to make even the most eligible prospective candidates wary of the weighty expectations of the watchdog role. For example, Schedule IV of the Companies Act 2013 requires an independent director to help in bringing an independent judgement on issues of strategy, performance, risk management, resources and key appointments, actually making him a semi or a co-promoter. The subjectivity of the statute far outweighs the objectivity of the role.

It’s common knowledge that the conventional iron grip of promoters in the management of Indian companies, as it is, leaves little room for independent directors to voice their opinions, leave alone protecting minority shareholders' interests. More often than not, they are expected to lend persuasive purpose to promoter-triggered decisions only to make them palatable for the consumption of other stakeholders. Their flair and finesse at this creative job essentially defines their utility and helps measure their efficiency. The new statute seeks to eliminate this inherent flaw but its inflexible and impractical design raises serious questions on its effectiveness in serving the larger cause of corporate governance.

First and foremost is the question of the supply-side availability in the market – i.e. the independent directors. Of the existing pool of individuals with the requisite experience and expertise and those also meeting the stringent entry criteria, how many have the bandwidth to take on new responsibilities? The Companies Act 2013 has stipulated a maximum of 10 listed companies and 20 overall as a non-executive director but even with this ceiling, the in-demand independent directors would still be gasping for breath in this age of marathon meetings and furious board room contemplation.

Is there a steady pipeline of young aspirants to bridge the growing demand-supply gap given the known fact that these positions are typically the prerogative of seasoned professionals who have carved their niche in the corporate world? If yes, are they qualified enough to deliver the goods? If not, is there any plan of designing niche training programs to help them raise the bar? Simply ensuring the maintenance of a database of eligible and eager candidates is not going to address the recruitment challenge, nor is the lead time of one year sufficient for hassle-free appointment of independent directors. Worse, one can’t rule out the fear of government or SEBI’s interference and influence in the creation of the said database especially in the case of PSUs. What would happen to the independence of the ‘chosen’ directors is anybody’s guess.       

Even when a company has identified the most eligible director, the issue of remuneration may well prove to be a show stopper if the sitting fees and profit-related commissions are found inadequate by the prospective candidate. That stock options have been disallowed by the new act may severely go against the startup community, which prefers extending ESOPs in the initial years rather than shell out hefty fees in hard cash. This handicap would surely have an adverse effect on their value proposition as recruiters.

The new act wants independent directors to play multiple roles – watchdog, facilitator, advisor, arbitrator and protector of minority interest – despite their own minority status in company boards. If this was not enough, they would also have to oversee CSR activities to check and report irregularities and also recommend and evaluate the recruitment, remuneration, removal and performance of directors.

The complexity of the job and its constraints leave little motivation for honest practitioners to assume independent director positions. And if they decide against accepting the thankless job, the open positions would largely be filled by mediocre professionals who may not necessarily believe in the larger cause of their roles of nurturing a sustainable corporate culture of ethical behavior, due diligence and good governance. If that happens, it would stand to defeat the very purpose behind the constitution of the new act.

Nitin Potdar is the M&A partner at law firm J. Sagar Associates. Views are personal.

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