Being at the forefront of a raging debate in India is no mean feat. Top it with the responsibility of being the conscience keeper of an industry or fraternity and one realises why Indian gods must possess multiple arms and heads. Ever since the Satyam saga unfolded, companies like Tata, Wipro and Infosys — long extolled for their exemplary corporate governance behaviour — have been at pains to explain India Inc’s position on the subject to all present and future stakeholders of the India growth story. In an email exchange with Aanand Pandey, Infosys chief executive officer and managing director S Gopalakrishnan (Kris to his colleagues) addressed some of the issues related to corporate governance — the role of independent directors, in particular — and conveyed that the solution lies in a mix of improved regulation, fair judgement and better transparency. Edited excerpts:
Industry observers say that Clause 49 of Sebi’s listing agreement is followed in letter but not in spirit since most independent directors are selected through promoter referrals. How can this issue be addressed? Is there a need to rethink the definition of “independent directors” in line with leading governance codes the world over?
The definition of independent director in Clause 49 is broad enough. The Indian Companies Act recognises audit committee and compensation committee of the board [of directors]. Clause 49 talks about audit committee and investor grievance committees. But there is no recognition in India of the requirement to have a “nomination committee” of the board.
Globally, there is a requirement to have a nomination committee of the board, which is vested with the responsibility of selecting and nominating new board members — both independent and executive directors. They have to follow a process and lay down clear criteria for selecting board members. We need to give legislative status to the need to have a nomination committee in India, too.
Also, globally most of the committees consist only of independent directors. But in India, there is no such requirement.
What could be done about the issue of the lack of quality independent directors, which analysts cite as a common issue in India? Is there a need to define the quality of independent directors as well?
It is difficult to define the quality of independent directors. As stated earlier, there should be a nomination committee of the board which consists wholly of independent directors. This committee should be vested with the responsibility of selecting new members to the board. They should lay down clearly what are the criteria the committee will follow in selecting a member to the board. As long as the committee is independent of the management and proper process is followed, it should be okay.
There is also a need to modify the regulations to make sure that independent directors are not punished for the wrongdoings of management. They are not part of the day-to-day management and if they [the independent directors] do not get adequate statutory protection from some of the misdeeds of management, then companies will not be able to attract good professionals to the board.
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The concept of third-party appraisal of directors is not practised in India. Companies like Infosys and Wipro follow this process, but a number of companies don’t. Should it be made mandatory here?
Companies must publish how the board is evaluated and what is the result of the evaluation. There should be a clearly defined board process to evaluate all its directors.
How can one ensure that independent directors perform their role objectively so we can minimise future slip-ups of the nature of Satyam?
We may not be able to eliminate corporate frauds altogether. No amount of regulations will help to stop frauds. At the end of the day, corporate governance is a mindset issue. We need stricter, stronger and quick enforcement of law by regulatory agencies so that it will act as a deterrent for others.