Why questions being raised on independence of independent directors

The Code for Independent Directors specified in Schedule IV of the Companies Act, 2013 lays down onerous role, functions and duties of Independent Directors. In fact, the whole edifice of good corporate governance is dependent on the efficacy and effectiveness of independent directors. However, concerns are being expressed time and again over their real independence and effectively discharging their duties, role and responsibilities.

When chairman of Satyam Computers, publicly admitted to cooking the company's books over several years, what shocked the investors the most was that none of the independent directors could spot the discrepancies in the books of the company. In the boardroom battle between Ratan Tata and Cyrus Mistry, some concerns relating to independent directors were raised.

And most recently, Infosys, which had been long considered the benchmark for good corporate governance practices in India, has seen its board come under attack. After these and more incidents like this, SEBI Chairman also expressed his views on the role of Independent directors "Auditors' committee is not working, independent directors are not independent and there is no stewardship code. This is a serious issue which is engaging the attention of SEBI. We will come out with more discussion soon".

Family owned business
In India, 15 out of the top 20 business groups are family owned. The majority of businesses are in the dominant control of the families. In the context of family owned Indian companies, the promoters' interests often over-shadow those of the shareholders. Moreover, the appointment and removal of an independent director is solely at the pleasure of majority shareholders. Even the Nomination and Remuneration Committee consisting of non-executive directors with the majority comprising of independent directors while making its recommendations has always at the back of its mind that it is the will of the directors holding controlling interest which will prevail.  

Appointment Process
At the time of appointing an independent director, companies often focus more on compliance with the independence requirement mentioned in the Companies Act as well as SEBI regulations and his amenability to the management instead of going into his competency to undertake the onerous duties cast on him. The independent director should be selected to provide specialist skill, add diversity to the board and provide independent appraisal. Independent director is expected to provide leadership vision and status and credibility to governance model to present public face of business. Therefore, there is a need on the part of corporates that while selecting independent director, the focus is on his skill sets and experience and his ability to perform the role envisaged of him.

For facilitating corporates to pick persons with the right skill set, there is need for a robust and reliable data base of persons available to take on the role. Unfortunately no such credible database is currently available and companies undertake their own search and diligence without being able to have an opportunity of access to a wide database to pick up persons as per company specific requirements. There is an urgent need to think of institutionalization of appointment of independent directors.

Need for training of directors
Training to directors to be able to analyze complex financial issues and to understand and appreciate what kind risks the company is taking on is important. This seems to be grossly lacking. Thus, not only a proper induction programme at the time of appointment of independent directors but continuing training programmes as well as executive sessions are essential to ensure that directors remain abreast of various developments and are adequately equipped to discharge their duties with full involvement and understanding.

Need for structured agenda
Every company has its formats and systems through which information is fed to the directors. Similarly, each company has its own practice of preparing reports, agenda for the meetings of board or committees etc. Just a few days before the board/committee meeting, piles of papers containing reports, concept papers, notes and sub-notes and agenda are dumped on the directors, which include, buried in the thicket of clauses, sub-clauses and foot notes, information vital for appreciation of the all the pros and cons of the issue for consideration.

The concept of structured agenda and uniform MIS is therefore, strongly advocated so that each director knows what and where to look at and the managements are not able to camouflage the information hiding essentials. Structured agenda and MIS will result in better and clearer understanding thereby ensuring effective participation with better results and less fear of going wrong.

Pavan Kumar Vijay is the founder of Corporate Professionals and is a fellow member of the Institute of Company Secretary in India