17 Oct 2017 17:20 IST

All you wanted to know about independent directors

IDs are required to take an autonomous view of the goings-on in a company

The Uday Kotak Committee on Corporate Governance has suggested that the number of independent directors (IDs) on listed company boards be raised from one-third to half. It also wants listed companies to ensure that they appoint one woman independent director.

What is it?

An ID is defined as a director on a company’s Board other than a managing director, whole-time director or a nominee director. IDs, by their very definition, are required to take an autonomous view of the goings-on in a company while overseeing its management. To ensure such autonomy, there are several restrictions on who can be appointed as an ID. For instance, an ID should not be a promoter or related to promoter of the company, its subsidiary or associates. An ID must not have been an employee of the company or of any audit/legal/consulting firm which earned a fee above a certain threshold from the company in the preceding three financial years. An ID should also not have had any pecuniary relationship with the company in the two preceding financial years or in the current year.

Why is it important?

The ID is envisaged as a watchdog on the Board to ensure good governance. Market regulator SEBI brought in the concept of IDs through Clause 49 of the Listing Agreement, 2000, which deals with corporate governance norms for listed companies. IDs act as the connecting link between the management of the company and its many diverse stakeholders. They are required to play moderator to the conflicting interests that arise in these relationships. They are expected to monitor, seek clarifications and raise questions on the happenings in a company. Over the years, the regulator amended the provisions to plug loopholes bringing in stricter norms for the selection and appointment of IDs and to give more credence to this role.

But despite strong regulatory backing, recent instances such as the Tata-Mistry spat or the Infosys Board shake-up show that more needs to be done. In the former, independent directors in listed companies such as Indian Hotels, Tata Steel, Tata Chemicals faced the wrath of the promoter group for throwing their weight behind Mistry. In the latter, independent directors were unable to play impartial peacemakers when founder Narayana Murthy repeatedly alleged governance lapses involving the Board.

Why should I care?

IDs are designed to act as trustees of shareholders, especially minority shareholders. They are expected to take an outsider’s view and ensure checks and balances in areas such as strategy, performance, key appointments, remuneration, etc. But when IDs fail in their duty or when conflicts arise between the IDs and the management/ founders/promoters, shares of the company take a beating. So if you are a shareholder, more IDs on a company’s Board is in your interest.

The Kotak committee seeks to strengthen the hands of IDs. It provides for minimum compensation for them and calls for more frequent exclusive meetings among them to discuss company affairs. It also ups their accountability by making it compulsory for IDs to give detailed reasons if they resign before the end of their term. In sum, citing ‘personal reasons’ or ‘family reasons’ when the going gets tough may no longer cut ice.

The bottomline

IDs are the tightrope walkers in the corporate circus. The more their experience, autonomy and clout, the merrier for minority shareholders.

(The article first appeared in The Hindu BusinessLine.)

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