It is easy to be critical of the idea of imposing a nine-year ceiling on the tenure of independent directors under Clause 49 of the Listing Agreement governing all publicly-held companies. There is the obvious question of the need for any cap on the tenure of independent directors. If there is no fixed tenure for the managing director or other directors, why should there be a limit for independent directors? Besides, there is the issue of the difficulty companies appear to be facing in identifying competent and experienced professionals who could qualify as independent directors on corporate boards. A cap on their tenure, companies argue, will make the shortage of able candidates even more acute. What has exacerbated the prevailing cynicism is the non-mandatory nature of the guidelines. Not surprisingly, many large companies, including even those with a decent corporate governance record, flout the guidelines, citing both their irrelevance and non-mandatory nature as reasons. Such companies also argue that the long tenure of independent directors on the board – often as long as 12 to 14 years – need not necessarily and always dilute their commitment to protecting minority shareholders’ interests or undermine their unbiased functioning.
Yet, the relevance and meaningful role of independent directors can hardly be over-emphasised at a time when good governance issues have come to the fore and India Inc can scarcely ignore, let alone violate, the norms of corporate governance and ethics. Independent directors of Rupert Murdoch’s News Corporation, hit by the recent phone hacking scandal, have already sought legal views on what they should do to shore up shareholders’ confidence in the beleaguered company. In India too, independent directors of some companies are said to have asked for special investigations into instances of governance failure. It is true that independent directors have limited access to information and clever managements can get away by disclosing to them only as much information as they think should be shared. In other words, even vigilant independent directors can be kept in the dark about tricks that managements may be up to. There are, for example, cases like Satyam in which either the independent directors were not in the loop on the financial wrongdoings being perpetrated or simply turned a blind eye because of their trust in or proximity to the promoter shareholder.
Ironically, however, these are precisely the reasons why the government should strengthen the institution of independent directors. To begin with, it must make the nine-year ceiling on their tenure mandatory. There is no reason why companies should not change their independent directors even after nine years. Shortage of available talent is no excuse. Supply will come forth to meet demand. Corporate India must learn to live without the cosy comfort of a few known names as independent directors with a term that is as long as near permanent. It is time the guidelines under Clause 49 were toughened by including in them penal provisions for companies that fail to honour the mandatory ceiling on the tenure of independent directors. And if necessary, the Companies Act should also be suitably amended to mandate similar guidelines on the appointment and tenure of independent directors.
