Giving independent directors more teeth: Here's what experts want

Consider this:  Of 644 independent directors who gave up their position in NSE-listed companies in 2018 (as of October 23), 272 did not give any reason for their action.  Another 217 cited personal reasons or pre-occupation as the trigger for giving up their position.  

The last year was no different. Of 735 independent directors who ceased to be in that position, 322 did not give any reason for quitting, says a study by Prime Database. 

In 1,794 NSE-listed companies, there are 7,114 independent directors occupying the non-executive position. The research by Prime Database shows that 53 of these independent directors are of age 30 years or below, with the youngest only 22-year-old.

Corporate sector observers note it is not unusual for independent directors to give up their non-executive position on the board at the earliest signs of fraud or allegations of mismanagement in a company. In recent months, there has been increased scrutiny of the monitoring abilities of independent directors, especially in companies hit by fraud or financial mismanagement. Stung by criticism, the Ministry of Corporate Affairs has set up a committee to suggest measures to make independent directors more effective in the functioning of a company. Experts, however, feel that while there is a need to make independent directors accountable to minority shareholders, one should be cautious of over-regulation. Micro assessment of the performance of independent directors should not interfere with the autonomy of the board, they add.

Experts point out that the Companies Act, 2013, along with Sebi’s Listing Obligations and Disclosure Requirements, has adequate provisions for the evaluation of the performance of independent directors. “There is no shortage of regulation,” says Cyril Shroff, managing partner, Cyril Amarchand Mangaldas.

The need of the hour is for the board, and individual directors, to act objectively, introspect and spend sufficient time and effort on the evaluation process, he says. The observations from this exercise should be considered as a positive feedback, and not criticism, he adds.

However, a common complain that many company law experts make is the Companies Act is silent on how the board evaluation is to be undertaken. “It only provides that the Nomination & Remuneration Committee shall carry out the board evaluation. The Listing Agreement is also silent on what process needs to be adopted for the purpose,” says Mahendra Swarup, chairman, Association of Independent Directors. Evaluation by an external third party could bring objectivity, independence and transparency to the process, he adds.

Most experts are not in favour of too much government interference in this matter. “As long as a director follows the due process, his/her decision should be allowed to stand without being second-guessed or further reviewed by the government/regulators, except in extraordinary cases,” says Shroff. He stresses the need for striking the right balance between ensuring accountability of the independent directors and their discharge of duties.  No amendment in any provision of the law is really necessary, says chartered accountant Shailesh Haribhakti.  “The letter and spirit of the existing laws, if followed, are sufficient to enhance the quality of independent directors,” he says.

Shriram Subramanian, founder and managing director, InGovern Research Services, agrees with this point of view: “The Companies Act already has enough to hold independent directors accountable. It is for the shareholders, mainly institutional investors, and the lenders, to demand more from independent directors.” 

Many experts, however, feel that there is room for the government to better define the process of appointing independent directors. “It is being deliberated that qualifications like graduation, chartered accountancy, company secretaryship, and cost accountancy may be specified and stated exhaustively as the prerequisite for a person to take up the position,” says Makarand Lele, president, Institute of Company Secretaries of India (ICSI). The Ministry of Corporate Affairs, too, is mulling over the need for a certification course for directors to equip them with the skills needed to perform their tasks, he adds. 

Pranav Haldea, managing director, Prime Database, says a minimum age and experience criteria are important to bring more gravity to the position of independent directors.

Evaluating performance

 
What experts want
 

• To be effective, boardroom appraisals need clearly defined steps and practices
• To ensure that board evaluations are treated seriously, the outcomes should be put out in the public domain
• Independent directors (IDs) should interact with shareholders, make presentations at the AGMs
• Better onboarding of newly-appointed IDs with comprehensive induction and training programmes; they should be encouraged to attend at least one refresher course  every year, besides participating in seminars and workshops
• To attract competent talent, remuneration of  an ID should be at least 25% of that of a full-time board members 

How other countries tackle the issue
 

• In most jurisdictions, the involvement of government bodies/regulators has been limited to recommending or prescribing the criteria to determine the ‘independence’ of the directors. Governments generally follow a ‘comply or explain’ approach
• Singapore and the US prescribe — on a recommendatory basis — an annual self-assessment and evaluation of the board, and in certain cases, of  individual directors
• In the UK, apart from internal assessment, large companies need a board evaluation, undertaken by an external independent evaluator at least every three years
• The recently published UK Corporate Governance Code, 2018, supplements the existing provisions of self-assessment and disclosure by calling for a description of the outcomes of such evaluation, actions taken, the influence of evaluation on the board composition, among other things
• The NYSE listing rules mandate that the boards of listed companies undertake an annual self-evaluation to determine whether they, and each of their committees, are functioning effectively