Tuesday, June 9, 2009

Government’s ‘Independent’ Directors

With the U.S. Government controlling various companies now, it is in the process of revamping the boards of directors of such companies. The obvious question relates to the role that the Government would take in the management of the companies, and particularly in the selection of their directors. In an op-ed column in the New York Times (NYT), Professors Gilson and Kraakman suggest the idea of a clearing-house for appointment of independent directors on such companies so that they are outside the purview of direct Government influence:

“What the Treasury needs is an independent, nonprofit clearinghouse to recruit and screen independent directors. Such an institution could easily be created by the government in cooperation with large institutional investors like public pension funds or large mutual fund groups like Vanguard or Fidelity. (Disclosure: one of us, Professor Gilson, is a director at American Century, a large mutual fund group.) At Harvard Business School, graduate students working under the supervision of Prof. Rakesh Khurana are exploring the forms that such a public-private clearinghouse could take.

Independent professional directors could help steer privately run corporations through this period of partial government ownership, helping to rebuild investor confidence in those companies. After all, private investors have no more experience investing in government-controlled businesses than the government has in running them.

Strong and independent boards of directors are needed to insulate corporations from political meddling. A chief executive cannot face down the government, but independent directors, who understand that their job is to protect the company from politics, can. In the end, Americans should be able to put their faith in these directors to assure that corporations that receive taxpayer assistance do not end up being run by the government.”

While this is certainly an interesting idea, a lot would depend on the integrity, conviction and independence of thought and action (as opposed to formal independence) of the individuals concerned. To take a recent Indian example, it was the Indian Government that nominated certain directors (with the approval of the Company Law Board) on the board of the embattled Satyam, but the outcome of such direct appointment was positive as the board was able to act in an effective manner so as to bring about a timely sale of the company and preserve the interests of all the stakeholders in the company. Although government nomination of directors is usually viewed with some amount of suspicion, this case was in fact an exception.

As for a directors’ guild or clearing house suggested in the column, there is already such an initiative existing in India in the form of the Directors Database, which is principally an online effort. The Database contains detailed statistics about independent directors on Indian companies, and this recent article by Prithvi Haldea (a founder of this database) provides an excellent account of the role of independent directors on Indian companies, particularly in the post-Satyam era.


CHAAHAT said...

Scrap the System of Independent Directorship in the Board - Is this the solution?
What are the role and responsibilities of an Independent Directors? How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……? Does the self regulatory mechanism has the solution? How far SEBI or any other regulators been successful in controlling? Is scraping of the system of IDs has the solution?
The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders.
The role of the independent non - executive is slightly more onerous than that of ordinary non - executives as they must also be completely free from any “conflict of interest”. That means they cannot have any vested interests, whether by personal shareholding, contracts with the company or relationships with the management. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest. The independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles.
When looking at the failures it is tempting to claim that the independents have failed miserably in their duties. But, when we consider the vast majority of companies that survive, or even thrive, the failures are a miniscule percentage of the greater whole of the listed companies.
In most companies the independents, supported by ethical non-executive and executive directors, manage to represent the shareholders' interests faithfully and well. The key issue is that we are dealing with a social system in a confidential operating environment. Ethical and tough directors will stand up for what is right. Unethical or weak directors will cave in to pressure and may do the wrong thing or simply turn a blind eye whilst others do the wrong thing or resign and go. It is impossible for regulators to regulate so that only ethical and strong people get onto boards.

Shareholders can help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviours in the boardroom:
• What skills each director brings to the board?
• How directors behave in the boardroom?
• What training needs were identified in the board performance review?
• What training has been delivered and what is planned?
• What specific governance/ director training do board members have?
Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director. It is therefore, pertinent that the ethical side of directorship needs to be recognised and managed far more than it currently is. It is observed that things are improving slowly, but there is still much to do to get all the deadwood cut out of the boardrooms.
P R Chandna

Anonymous said...

Independent Directors – A Myth

I have recently read the above mentioned article posted at the web site: http://www.directorsdatabase.com/IDs_Myth_PH.pdf, which a well researched article and an eye opener for all of us.
I recently came across the annual reports of well know companies like, Larsen & Toubro, Biocon, Blue star, Merck, etc. On going through the Director’s report on the Corporate Governance. I was really surprised to see that one of the non - executive independent director in these companies holds the post of directorship - Chairmanship / Alternate / Non-executive of around 52 companies, including, listed, unlisted and foreign companies. As it has already been pointed out in this article - it is unbelievable that such directors could judiciously provide time to even read the board meeting agenda papers, what to talk about the active role in discharging effectively his foremost duties towards the minority shareholders.
Assuming, with no unexpected crises, active board service, including preparation, takes up to on a conservative estimates two and half times the number of hours spent at a meeting. So if, ideally a board and its committees meet six times a year (8 in L&T, 4 in Biocon & 5 in Blue Star, etc.) for an average length of six hours, board business occupies 10 to 11.25 days of an individual director’s in a year per company. Now, one can easily calculate how many days will be required to be spent by an individual director, who is on the board of more than fifty companies. It may not be out of place to mention here that in each and every exceptional case of such type, the regulator need not be blamed, it is therefore, essential that the directors appointment committee/ Company secretary need to thoroughly evaluate all these factors before putting up the proposal for appointment finally by the shareholders.

Pushkar Raj Chandna said...


It is a human nature to be greedy at the expense of others. Some of these "Super (human) Independent Directors”, whose foremost duties toward the minority shareholders are being overlooked for the same reason. The IDs who are on the board of companies as high as around half century (50) will never be independent of mind( one of the main principle of Good Corporate Governance), thus not eligible & qualified to be on the board on behalf of these minor shareholders.

It is now the duty of the regulatory authority to intervene and make suitable amendments in sections 275, 276, 277 & 278 of company act and reduce the number of company an individual ID can hold to ten (10) instead of present fifteen (15). The regulatory authorities should also go a step further to include unlisted / private companies, in the forthcoming Indian Company Bill 2009 to curb gross misuse by some of these greedy Super (human) Independent Directors.

Source: http://www.directorsdatabase.com/

Pushkar Raj Chandna said...

Super (Human) Independent Directors

The Hon’ble Union Minister for Corporate Affairs, who had delivered the inaugural address on 21st August 2009 at the “National Conference on ’Corporate Governance’” organized by the Institute of Directors, asserted the government’s commitment to demystify issues relating to corporate governance.

Referring to the new Bill on company affairs, the Minister said the government was working to simplify the law by bringing down the provisions from 600 to about 400. He further said that there was a need to restrict the number of directorship an individual could hold. “We don’t have superhuman being to be the director of 20-25 companies”.

“Those aspiring for the posts should be aware that it is a position of responsibility and not a joy ride,” he said. (Source: Business Standard (New Delhi Edition) dated 22nd August 2009)

The above issue of "Super (human) Independent Director" was commented upon by me on the blog “Indian Corporate Law” on 30th July 2009, as above.

In view of the above, it is pertinent that, those IDs holding such ornamental posts, on the moral grounds should of their own resign from some of directorship before they are removed through the enactment of new company law and get humiliated later.

It would also be, not out of context to mention here that the Chairmen/ Chairperson / Nomination committees of those corporate should set an example of good corporate governance and ask these IDs, who are holding so many posts on the board to go immediately. Not only, the reputation of these companies is at stake, but it would lead to plummet of these companies' shares in the stock market thereby affecting the minority shareholders values, like in the case of Satyam.

P R Chandna

Pushkar Raj Chandna said...

Bhopal Gas Tragedy & Liabilities of Independent Directors

How can Independent Directors (IDs)/ Non- Executive Directors (NEDs) are held legally responsible for something which may go wrong or lapses in compliance on the part of the management, including the whole-time directors?

Do you agree that the law should be modified to exclude independent directors from any criminal liability for offences committed by the corporations?

After the recent past Satyam episode, a debate has once again hit the roof concerning the role of Independent Directors (IDs)/ Non-executive Directors (NEDs) on the Board after the lower court’s recent judgment on “Bhopal gas tragedy” - that had claimed an estimated 15,000 – 20,000 lives and few hundred thousand suffered from various crippling ailments & blindness for the past two and half decades. The court has held Mr. Keshub Mahindra, ex-chairman, Union Carbide India, guilty and sentenced him to two years of imprisonment.

Some strongly feel that an act of negligence by a corporation that has resulted in so many deaths and sufferings to the people for so long should not go unpunished and stopped being manipulated with no one held accountable.

Whereas, a cross-section of IDs/ NEDs are apprehensive about meeting a similar fate for misdemeanors on the part of others – executives who are solely responsible for the day-to-day running of the corporations. The likely fall out could be exodus by way of number of them resigning en masse and none would come forward henceforth to take up the assignments of IDs.

There are many such questions being asked and these needs to be addressed for the benefit of the India Inc.

Pushkar Raj Chandna said...

Cap on number IDs can sit on Companies a must!!!

It is heartening to know that, SEBI is considering a proposal to cap the number of company boards that an independent director can sit on. The aim is to ensure that independent directors get enough time to analyze the agenda of the board meetings and make meaningful contributions. In order to give enough attention to all business details, independent directors do need a considerable amount of time. Voluntary guidelines issued by the ministry of corporate affairs say that an independent director should not serve on the boards of more than seven companies, which should be inclusive of unlisted and holding and the foreign companies. Furthermore, in case a law or consulting firm does advisory job for a company, having a partner from there as independent director in the said company, is not desirable, as it could lead to “conflict of interest”. Read the full news article on Economic Times: http://economictimes.indiatimes.com/markets/indices--regulation/SEBI-proposal-Independent-directors-face-board-cap/articleshow/6424040.cms

P R Chandna - http://footprints-carbon.blogspot.com/

Pushkar Raj Chandna said...

‘One cannot be independent director in more than 5 listed cos’
Indian Express 1st September 2010: http://www.indianexpress.com/news/one-cannot-be-independent-director-in-more-than-5-listed-cos/675701/0

The Standing Committee on Finance has recommended that a person may be an independent director in only five listed companies and 10 public companies. While there is no cap at present, the Ministry of Corporate Affairs (MCA) had proposed that a person may be an independent director in seven listed companies and 15 public companies.
In its report on the Companies Bill, 2009, tabled in Parliament today, the committee suggested that the number of such directors in a company should be capped at 15, excluding the directors nominated by the lending institutions. It has also called for a Code for independent directors that elaborates on their role and responsibilities vis-a-vis other directors, their remuneration and extent of their liability.
P R Chandna