Friday, May 9, 2008

An Examination for Directors

A few weeks ago, we carried a post by Pramod Rao discussing the implications of recent changes to Clause 49 of the listing agreement, the key ones being strengthening the role of the independent directors on boards of Indian listed companies. Although relegated only to a non-mandatory provision, one of the changes states that a “company may ensure that the person who is being appointed as an independent director has the requisite qualifications and experience which would be of use to the company and which, in the opinion of the company, would enable him to contribute effectively to the company in his capacity as an independent director.”

Although corporate governance norms are being tightened to provide for stricter definitions of “independence” and to enhance the role of independent directors, there are likely to be implementation problems on a continuing basis when viewed from a practical standpoint. Independent directors are either busy professionals who do not have sufficient time to devote to board roles on companies, or they are sometimes persons without the requisite qualifications to make effective contributions to boards in an increasingly complex business, financial and regulatory environment.

In order to overcome some of these problems, two US law professors, Ronald Gilson and Reinier Kraakman (in their article “Reinventing the Outside Director: An Agenda for Institutional Investors”) had suggested way back in 1990-91 that there should be a cadre of professional directors created to serve on corporate boards. These professional directors, as they envisaged, will be independent of management and shareholders (and thereby satisfy our current definition of independence) with requisite qualifications in business, finance and so on, and their only occupation will be that of acting as independent directors on say 6 boards in all. This way, these directors will be able to apply their expertise in monitoring corporate managements as independent directors on a full-time basis without being distracted by other vocations. However, that idea has not yet found favour in the corporate world, neither in India nor in any of the other recognised jurisdictions.

However, a concept that comes close to the idea of a professional director is one of a qualifying examination for directors. The Financial Times carries a report Directors face tough tests that describes the Chartered Director test prescribed by the Institute of Directors in London:
Businesses – even modestly sized ones – face increasing levels of complexity as far as compliance and risk management are concerned. Where should an aspiring director turn for an up-to-date, robust preparation for the role he or she is hoping to perform?

One place you might not expect to find cutting-edge advice on the issue is the august, Grade 1-listed John Nash building that is home to the UK’s Institute of Directors, a venerable employers organisation.

The outward appearance may not suggest modernity. But the IoD has gone further than any other institution to codify the director’s role, and offers a meaningful and relevant qualification – that of the Chartered Director (C Dir) – that should help both executives and non-executives prepare for the demands of the job.

Launched at the start of the decade, the C Dir is not a pseudo-label that can be acquired by sitting through a few lectures and sending off a couple of vouchers in the post. An aspiring C Dir has to clear several high hurdles before being awarded the qualification. To date, 660 have achieved the title, fewer than 100 a year since its inception.

“Getting my PhD was a doddle compared with this,” says Suzy Walton (left), an occupational psychologist, non-executive director of several organisations, former member of Tony Blair’s delivery unit in the UK cabinet office – and a newly minted C Dir. “These were the toughest set of exams I have ever done. I practically had to move into the IoD while I was preparing for them. I know all the best places to sit and work there.”
Such measures would ensure that independent directors not only satisfy the technical requirements of independence, but are also independent in state of mind and have the necessary capabilities and resrouces to truly challenge management on key business and corporate decisions. It is well worth thinking on the lines of mandatory qualification and training for independent directors even in the Indian context so as to make their roles and contributions more meaningful, not just in compliance with the letter of law, but also in the true spirit of corporate governance.

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