06 Jan 2016 19:58 IST

Are Independent Directors geared up to deliver?

Independent Directors have a great opportunity to elevate the standard of corporate governance in India Inc. They should not squander it   -  Shutterstock

Their role has been given a complete makeover under the new company law and listing regulations

The role of Independent Directors (IDs) has undergone a complete makeover under the new company law and listing regulations.

While roles and responsibilities of Independent Directors were not clearly defined in law, they were nevertheless expected to bring technical expertise, an element of neutrality, and independent perspective to deliberations. The Companies Act 2013 has codified the duties, responsibilities and obligations of IDs.

From an advisory and oversight role, there is a shift towards greater ownership and involvement in executive functions. Approval of related party transactions, and ensuring a working whistleblower mechanism are examples of when the onus will be on IDs. For the institution of Independent to measure up to the expectations of stakeholders, there are some key imperatives which require attention and ironing out.

Commitment

One of the chief duties of a Director is to provide strategic guidance to the company and monitor the performance of management. In fact, under the listing regulations, there is clear expectation that the IDs must get involved in strategy.

However, there is a piece of statistics, which is discomfiting and serves as an eye-opener. An average director spends 8.7 days* in a year on the board of the company. Irrespective of the capability of an individual, there has to be greater time commitment to make a meaningful contribution.

Involvement of IDs cannot be limited to participation in meetings. Continuously updating knowledge, preparing before meetings, actively participating in them, following up on action points, and seamlessly engaging with the management, are extremely important points. The trend of ‘busy boarding’ or ‘over boarding’ (joining multiple boards) has to be given a decent burial. IDs would have to be selective in joining boards, and spend quality time in the affairs of the company.

Selection policy for IDs

A transparent and robust selection policy is important to the effectiveness of IDs. Past experience suggests that a structured process to identify directors is a rarity and that personal contacts or networks are a preferred choice. Familiarity breeds contempt.

Further, this approach deprives the corporates access to a large talent pool, which is capable of challenging the management and in the process, adding value. A structured selection policy is important if we want to have IDs who are truly independent and capable of discharging duties that is expected of them by law and stakeholders.

Lead ID

Only 8 per cent* of the companies in India have a lead independent director, who primarily reviews and advises the board on agendas, and represents views of the other independent directors. The institution of a lead director is strong in mature jurisdictions; it provides leadership to IDs, acts as a bridge between the board and management, and facilitates the board evaluation process. The Companies Act 2013 now mandates that Independent Directors have at least one meeting without the presence of the management.

The lead ID can play a vital role in anchoring and guiding discussions, which, at times, tend to meander along meaninglessly, in absence of leadership.

Corporate culture

Corporate culture is a set of shared values, behaviours, beliefs, customs, and written and unwritten rules, usually developed over time, that guide the way people in an organisation do things. Establishing a culture where people do the right thing at the right time is critical to a company’s ability to seize opportunities and minimise the impact of mistakes.

However clearly risk appetite and controls are defined, people will not make the right decisions consistently unless the corporate culture naturally reinforces ‘doing the right thing’. The culture should come from the ‘tone at the top’, which is a cardinal principle for good governance and is recognised by global standards of governance, including COSO 2013.

If leaders embody the philosophy and operating style they have defined, over time, employees will understand what is and is not acceptable with relation to risks and controls. An organisation with a culture aligned to its objectives is more likely to be resilient, than one without.

If Independent Directors could help establish value architecture right, it is more than half the job done. The importance of culture is recognised under the regulatory provisions. Clause 49 of the listing agreement mandates the Board to set a corporate culture and the values by which the executives will behave.

Risk environment

The dynamic business environment, political uncertainty and ever changing regulatory landscape contribute to the risk environment. Erstwhile clause 49 and listing regulation cast an onerous duty on the Board of Directors.

The Board, while encouraging positive thinking, needs to balance optimism with caution. Risk management is an area where Independent Directors can make a huge impact, and for that, they would need to engage more with the management on risk assessment and more importantly, on the possible safeguards and crises management. They are in the best position to take a detached view while evaluating business decisions.

Board evaluation

It is common for companies to appraise its vital organs like officers, employees, business units, business partners and vendors. It is a rarity, however, to see the Directors, who are the most significant contributors in a corporate, being subjected to an appraisal or evaluation.

Resistance to change is inevitable. Especially, with the promoter-directors forming a major chunk of Indian Boards, the process is likely to encounter initial hurdles in the form of reluctance in sharing fair views, ensuring transparency and building trust. Independent Directors can play an important role in assuaging the concerns and apprehensions of Directors and spearheading the evaluation process.

The new company law provides for greater empowerment and increased accountability of Independent Directors. However, compliance with merely the letter of law without embracing its spirit will have a very limited effect.

To enhance effectiveness of the board, and “make it matter”, Independent Directors would need to be alert, proactive, and committed to spend quality time. IDs have a great opportunity to elevate the standard of corporate governance in India Inc. They should not squander it.

* India Board Report 2015-16

Videos

Can India become a $5-trillion economy by 2025?

'Children are having a bigger say in family purchases'

What is RCEP and why did India stay out of it?

Recommended for you