Rajat Gupta has offered to be relieved of his responsibilities as the chairman of the executive board of Indian School of Business. The board will meet on April 2 and take a call on his offer. Gupta, ever since the Securities Exchange Commission charged him on March 1 of leaking market-sensitive information to Raj Rajaratnam, has resigned from the boards of Procter & Gamble, Harman, American Airlines, Genpact and New Silk Route. He has also exited the Public Health Foundation of India and Emergency Management & Research Institute.
The final word on Gupta is not yet out. It’s perfectly possible that he may walk out exonerated of all charges. What the episode has done is turned the spotlight on the role of independent directors on the boards of companies. The matter has been brewing for a while. A few days ago, on March 11, the Securities and Exchange Board of India (Sebi) had barred three independent directors of Pyramid Saimira from sitting on the board of any listed company for two years for giving false and misleading statements.
Rules laid down by Sebi stipulate that independent directors ought to make up one-half of a board led by an executive chairman and one-third of a board that has a non-executive chairman. The idea is that promoters shouldn’t enrich themselves at the cost of the business and the company should comply with all rules and regulations. The idea is noble. But rarely does one hear dissent from an independent director.
For the independent director, this is easy money. Each board meeting can fetch him up to Rs 20,000. The law allows 1 per cent of the profit to be distributed amongst the independent directors, and there is no cap on the stock options that can be offered. Prithvi Haldea of Prime Database had found a retired bureaucrat who had made Rs 2.2 crore in 2007-08 from his directorship in ten listed companies and two foreign companies. His income from four unlisted companies was on top of that. It’s a cosy club. No promoter wants strangers on the board, and independent directors are only too happy to play along.
Analjit Singh has tried something new. Nine independent directors have been appointed on the boards of four of his companies: Max India, Max New York Life, Max Healthcare and Max Bupa. Singh claims that he didn’t know seven or eight of them. According to him, executive-search specialist Egon Zehnder helped him zero in on the attributes required for the directors and then helped him find such people. On the Max India board, though he is the chairman, Singh does not represent the interests of the family. Instead, his family has appointed Ashwini Windlass, one-time head of Max India, to represent its interests. If the family has an issue, it is raised by Windlass and Singh may have to answer it!
But such instances are few. Primedirectors, a website promoted by Haldea to serve as a platform for independent directors, lists no fewer than 14,797 profiles — technocrats, retired civil servants and army personnel, doctors, engineers, chartered accountants, corporate honchos and lawyers, etc — and another 5,603 profiles are being processed. This should have been mined by all listed companies because these are highly-qualified people — there are 698 IIM graduates, 260 serving and former professors of IIMs, IITs and IISc, 1,157 hold doctorates and 85 per cent have work experience of at least ten years. Yet, Haldea says that only 350 companies have searched the website extensively and some 200 independent directors have been picked from it. To put the number in perspective, there are 4,946 companies listed on the Bombay Stock Exchange that need to comply with the rules on independent directors.
Their quality too remains suspect. In a paper titled “Independent Directors, A Myth”, written in May 2009, Haldea had said that 198 independent directors were non-graduates, of which 75 per cent had not gone to college, and another 3,500 were plain graduates with no additional qualification. Of course, higher education is no guarantee of good governance but qualified people on the board can help. There was a time when Ranbaxy, India’s largest drug maker, didn’t have even one scientist on its board. However, several followers of the Radhasoami Satsang, of which the former promoter family happened to be followers, were appointed on the board.
Disillusioned with the whole concept of independent directors, Haldea says the work of the market regulator and auditors cannot be assigned to independent directors. Do they have the tools and expertise to detect fraud? Excessive policing hasn’t helped the cause of corporate governance. Ever since the Satyam scam broke out in January 2009, Haldea says that over 2,000 high-quality independent directors have resigned. This is not a good sign.
Satyam is a good example of what independent directors can do. The independent directors on its board drew a lot of flak because they had no clue of Raju’s misdemeanours carried out over seven long years. But directors appointed by the government did a wonderful job of holding the company together at a time when it appeared very close to implosion. Many of them worked overtime, personally called customers to hold on to Satyam and assured them of high-quality service delivery.
