With corporate governance becoming the focus of attention, the significance of independent directors on company boards has increased manifold. Omkar Goswami, an economist and corporate advisor, who serves on boards of many reputed companies like Infosys, Dr Reddy’s, Cairn India and IDFC, among others as an independent director, shares his views with Joe C Mathew on the recent changes proposed by the ministry of corporate affairs on the role, responsibilities, tenure and selection of independent directors. Edited excerpts:
How do you view the corporate governance guidelines of Securities and Exchange Board of India (Sebi) and its prescriptions for independent directors?
I have no problem with the existing clause 49. In part, I cannot, because I was a member of the committee headed by [Infosys founder] Narayana Murthy that drafted the guideline. So I am a party to the guideline. I have absolutely no objections to either the mandatory part of it, or the recommendatory part. Consider, for instance, the tenure of independent directors. Sebi places it at nine years. But that is a recommendatory good principle as far as the Sebi guideline goes.
Do you agree with the idea of a mandatory term?
I would not like to see the term of a director made mandatory. A director is elected by shareholders. If the shareholders believe that the director coming up for appointment is fit to be one, I feel the person should continue serving on the board. To be fair, some conditions could be enforced. One of them is that a director coming up for re-appointment should have an adequate attendance record. I would suggest that a director should have at least 75 per cent attendance to be considered for re-appointment. My question regarding making it mandatory for independent directors to serve no more than two consecutive three-year terms is this: is there a mandate on how many terms can a person be elected to Parliament? If people or the voting collegiate votes for them, they remain our legislators. Right? That is the framework of our Constitution. Thus, I do not believe there should be a law that says for how many terms you can sit on a board. It is a matter for first the board and then the shareholders (or owners) of the company to decide. Equally, I believe it is a good practice for independent directors to exit after nine years.
People feel that if you are associated with a company for long, it may affect your ability to take independent calls?
I completely disagree with such an opinion. Either you are independent or you are not. You should move into a board with an attitude that if there is something that you have to say that goes against the interest of the promoter and the management you have to say it because it is correct. If you don’t, then you are not independent.
Do you think independent directors should be remunerated? Given stock options?
I believe that directors should be earning money for the work they do on a board. No one should work for any “for-profit” enterprise, as a fiduciary or otherwise, without pay. According to the Companies Act, 1956, remuneration payable to all independent directors must come out of one per cent of the net profit of the standalone company. Typically, it is much less than that. I think it is perfectly correct. I also think it is perfectly correct if stock options or deferred stock are given to independent directors. Does this make them less independent? I don’t think so. The ones I have had the privilege of associating with on boards, and the ones I consider worthy of being independent directors, have never behaved an iota differently in exercising their judgement or opinion because of commission or stock options.
To what extent can independent directors be held responsible for the mismanagement or ill deeds of the company?
It is a tricky situation. Here, the ministry of corporate affairs has recently written some very good rules. Independent directors should not be held accountable for everything that happens in a company. For instance, there is absolutely no way that Keshub Mahindra can be held responsible for the Bhopal tragedy because he was an independent chairman; not the factory manager, not the CEO nor COO. A terrible tragedy happened in Bhopal. Keshub arrived there as quickly as possible to commiserate. He can’t be held responsible for the tragedy.
That is an extreme situation. What about other frauds?
Remember that matters that do not come up to the board or its committees tend to remain underground. At the end of the day, the most hard-working independent director that you can envisage will not be spending more than 25 days in a year looking after the fiduciary aspects of a company in any given year. Lots of things happen in a company that do not reach the board level. If you have a good sense of the company and its management and a “nose” that you trust, you can ask for certain matters to be part of the committee or board’s agenda. Good independents often do. But the truth is that if a company wishes to hide things from its independent directors, more often than not, it can. Therefore, the choice of companies to serve on the board becomes critical. I always say you shouldn’t join a company’s board if it does not pass your “smell test”.
What do you think about the Satyam accounting fraud?
It is difficult to say. I don’t know what came up to the board or the audit committee. The fact that there was a scandal of the highest order is very well known. I am still amazed at how three or four guys of a huge global enterprise could so comprehensively fudge the accounts quarter after quarter. At the end of the day, if the CEO, the CFO, the statutory auditors and the internal auditors are working in cahoots, I reckon that one will be able to know about it. In such a situation, I wouldn’t immediately point the fingers at outside directors. It is easy to say they didn’t do their job. More likely, they were overawed by Ramalinga Raju and, being so, were probably taken for a ride. That brings me to a key attribute of an independent director: while a person should be collegial, she or he must have a necessary dose of scepticism.
Do you think there should be a limit to the number of companies in which one can simultaneously serve as independent director?
I have nothing against it per se. I think the five or six company limit is a bit stringent. I would have made a case for it to be no more than 10. One of the problems that will arise is that companies will find it very difficult to get independent directors. There is a huge supply-side problem. No one admits it; no one wants to say it. The reason some directors sit on so many boards is that they are good. And there aren’t enough of them going around. It doesn’t sound nice, but it is true.
Why is it so difficult?
In order to be a board member, you have to know and learn a lot of things. What the company does; how it actually works; you need to know finance and accounts; how the company sells its products and services; what is the competition doing; the capabilities of key managerial personnel; and the SWOT of the company, which changes quite often. You should know how to ask the right questions; how to be tough and yet be polite. These are not easy things. So it’s going to be very difficult to choose the right people. And the liabilities are quite high.
Is empanelment of independent directors a solution?
It doesn’t work.
But that’s what the Companies Bill has proposed?
Empanelment of directors is hogwash. At the risk of hurting one of my close friends, Prithvi Haldea, I should say it does not work at all. Think about it. You are running a company whose top line is Rs 2,000 crore, and you urgently need three directors because three of your board members will finish their six-year term after the Companies Bill becomes law. Will you be going up and down a government-approved empanelled list? In all likelihood, you will call people whom you trust and ask them to suggest good names; then meet them; shortlist them; and choose. That’s how it will work. You can’t have a UPSC list for independent directors.
