Till about 30 years ago, there used to be umpires from the host country for international cricket matches. Overseas teams, particularly those visiting the Indian subcontinent used to accuse unfair umpiring all the time.
To get rid of these accusations, Pakistan cricketer Imran Khan supported and, in a way, masterminded the concept of neutral umpires for international matches. The ICC too realised it was the remedy for the accusations hurled at domestic umpires and gradually adopted neutral umpires. Today, neutral umpires have most airmiles in the cricketing fraternity. However, has it eliminated all the concerns the concept was born to eliminate in the first place? No, field umpires are still attributed wrong and unfair dismissals and their decisions are subject to review. Now, you have a third umpire, a match referee and what not … the situation doesn’t seem to have improved much actually.
Hey, what am I talking? Isn’t this supposed to be an article on independent directors?
Oh, yes …
Public shareholders (read ‘minority’, many if not most of the times) in public companies for long used to hold grudge against the management (invariably the promoters and their nominated professionals, mostly family members) – e.g., they do not have any say in management of the company, they are being oppressed, the company is being mismanaged, and so on ….
To eradicate these concerns, a concept of Independent Directors emerged on corporate landscape. That is, individuals possessing high qualifications, track record, stature, ethics, integrity, independent character, etc. who are not dependent on the promoters for their bread, butter, survival. It was expected that such people would bring in more professionalism, clarity, transparency and ethics into corporate functioning.
Section 149(6) of the Companies Act, 2013 (“the Act”) provides a very detailed definition of an independent director. The independent director, in the opinion of the Board, has to be a person of integrity, possess relevant expertise and experience and not have a material or pecuniary relationship with the promoters or the subject company or any related persons / entities.
The Act mandates all listed public companies to have at least one-third of the total Directors to be independent. Certain other categories of unlisted public companies too are required to have at least two directors as independent directors.
The Act mandates all the independent directors to meet at least once in a year without the attendance of other directors, inter alia, (i) to review the performance of non-independent directors, chairperson and the Board as a whole; and (ii) assess the quality, quantity and timeliness of information flow between company management and the Board that is necessary for effective and reasonable performance of their duties. Appointment of an Independent director is also required as a member or as a chairperson in various committees.
Further, an independent director is expected to abide by the provisions specified in Schedule IV to the Act. This Schedule, inter alia, stipulates guidelines of professional conduct, role, functions, duties and mechanism for performance evaluation of independent directors.
However, it seems far from a happy ending. The current scenario is far from what was scripted. It seems the more things change, the more they stay the same.
The role of independent directors was questioned big time in Satyam Saga in January 2008. Despite getting the coveted awards for best managed company and being the epitome of corporate governance, it was clear that there was no control on what was going on in the company.
Eight years later, we are again at the same crossroads witnessing Tata Sons – Cyrus Mistry spat. The role of independent directors is still under cloud. Are independent directors actually contributing to corporate governance or just enjoying the perks of high office? The general feeling is that independent directors are by and large sympathetic to and on the side of management, whenever there is a requirement for them to take a tough call. Meaning they are independent just technically and legally, but not really!
Now, this is serious business. Independent directors are expected to play a vital part from corporate governance perspective as well as for the protection of small shareholders.
Part of the problem is that an independent director cannot have an effective role in management despite their integrity and ethical practices. They do not participate in a ompany’s day to day business nor in decision making on all issues. They also depend on the promoters for their appointment, continuance, perks and so on.
However, I feel even if not individually but as a collective pressure group, they may be better placed to identify potential pitfalls and red flag the issues at Board level. They must question the Board’s actions from time to time to ensure good housekeeping, upholding corporate governance and ensuring fairness in every corporate actions.
It is said about the auditors – they need not be bloodhounds but they must play the role of watchdogs. The same analogy applies to independent directors – they are there for the sake of good governance and benefit and confidence of non-promoter investors, minority shareholders and market regulators (SEBI, etc.). They must act neutrally, ethically, professionally, as check and balance on the acts of the board and management of the company. Unless they do it, having them on the Board does not serve any purpose. Unless they take their job seriously and add value to the management and shareholders, it’s unnecessary compliance and expenditure a company is saddled with.
