Half of BSE 500 boards not independent, says report

IiAS study finds substantial non-compliance with listing agreement regulations and even more with the spirit of these rules; asks these top firms to take a lead in reforming

A little over half of the top 500 listed companies do not have enough independent directors (IDs) on their boards.

This would defeat the purpose of regulations which rely on impartial and independent boards of directors for objective oversight of companies’ actions and for minority investor protection.

According to a study titled ‘Board effectiveness: Through the looking glass’ by Institutional Investor Advisory Services (IiAS), 139 companies in the S&P BSE 500 have less than 50 per cent of the required IDs. Sixty per cent of those have less than 33 per cent. As many as 94 per cent of public sector units (PSUs) don't have enough.

According to Sebi’s Listing Agreement Clause 49(II)(A)(2), "Where the chairman of the board is a non-executive director, at least one-third of the board should comprise IDs. If the company does not have a regular non-executive chairman or where such non-executive chairman is the promoter, at least half the board should comprise IDs."

Currently, 17 per cent of the boards (85 companies) are directly non-compliant with these norms. The number goes up if one takes into account the spirit of the regulations. About 21 per cent of IDs have had a tenure more than 10 years, which is likely to impede their ability to be unbiased.

“If all these vintage directors (tenure  >10 years) are considered non-independent, the non-compliant boards increase to 54 per cent. Companies need to address this issue, to improve investor perception about the quality and objectivity of the board processes,” the proxy advisory firm said in its study.

Citing an investor survey, where 90 per cent of the respondents said a balanced board composition, with strong representation from IDs, is critical to the success of any corporate governance structure, IiAS advised listed companies, especially those in the S&P BSE 500, to take the lead and start complying with the spirit of the regulations.

It has asked them to classify directors on the board for 10 years, as non-independent and induct additional IDs to comply with the composition norms. Only 16 per cent of the chairpersons are independent. Further, in family-run businesses, 83 per cent of chairpersons are members of the promoter family. This deprives the board of an impartial perspective on operations.

In some cases, if the same individual serves as the company’s chief executive and as its chairperson on the board, objectivity might be hindered.  For, the arrangement provides little transparency on the management’s actions, allowing the board agenda to be driven by an individual.

Globally, corporate governance advocates have therefore started to push for a separation of such roles.  In India, however, a large number of companies (47 per cent) have chairpersons in an executive capacity.The study also said only a fifth (71) of the 333 family-owned businesses in the S&P BSE 500 have professional managements -- that is, not having any promoters in an executive capacity.