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Independent directors' appointment norms need an overhaul

News that eminent people earn in eight digits from independent directorships raises afresh the question of the role of these board members in corporate India. No one should grudge independent directors their fees, and it is healthy that the Companies Act, 2013 has raised the minimum sitting fee from a laughable Rs 20,000 to Rs 1 lakh per meeting. The bigger issue, and one that should concern companies and independent directors themselves, is the true value the latter can deliver. The concern arises because independent directors have more substantive responsibilities than ever before. For the first time, their role and responsibilities have been outlined in the Companies Act (the 1956 version of the law did not contain any reference to independent directors; they were mentioned only in Clause 49 of the listing agreement). Under the 2013 law, independent directors are required to sit on audit committees, nomination and remuneration committees, corporate social responsibility committees and also have pretty stringent whistle-blowing responsibilities. They are also required to hold once a year a meeting among themselves and without the management to assess the company's performance. This is in line with global best practices and designed to stall Satyam- or Kingfisher Airlines-type implosions.

But if all of this sounds like a full-time job for one person in one company, consider also that independent directors are permitted to join a maximum of 10 boards. At this maximum, and given that an independent director is required to attend at least four meetings a year, he or she could end up attending at least 40 meetings a year. If that sounds doable over 12 months, consider that board meetings typically converge around the quarterly results announcements, which means meetings are crowded around four months of the year. At this level of meeting intensity, it is worth wondering whether an independent director can do full justice to the job entrusted to her.

This problem is compounded by the fact that there is a chronic shortage of quality people to staff corporate boards in India - especially since the Act requires independent directors to comprise a third of the board in listed companies. As a result, a few good men and women end up serving on eight to 10 boards. Given that there are 850,000 companies in India, according to Corporate Affairs Minister Sachin Pilot, many of them family-managed, it would probably be helpful to the cause of corporate governance if the maximum limit were, say, halved. In the US, for instance, where governance may not be perfect but the norms for it are more stringent than those in India, most board members do not serve on more than three boards (Rajat Gupta being a notable exception that provided a salutary lesson on the dangers of multiplicity). This may exacerbate the shortage, but it will force companies to widen the pool from which to draw.

One way of attracting more talent (and surely there is no shortage of that in India) could be to liberalise the fee structure, linking it to profit or turnover, in the same manner as CEO fees, and reintroducing stock options, a move that would go a long way towards helping start-ups. Either way, a more realistic approach is urgently needed so that independent directors become genuine custodians of corporate governance.