Thursday, October 6, 2016

Briefing on Board Independence

The new edition of the NSE Quarterly briefing is on “Issues in Board and Director Independence” and is drafted by Professor “Bala” N. Balasubramanian. The executive summary is as follows:

- Worldwide, corporate governance best practices and regulations recognise the need for boards and directors to be independent and objective.

- In a country such as India, where concentrated ownership dominates the corporate landscape, the main rationale for board and director independence is to protect the minority shareholders from possible exploitation by the promoter or controlling shareholder (CS), who may also act as the CEO.

- Despite a number of regulatory initiatives to preserve it, ‘board independence’ continues to be undermined in India.

- Factors that inhibit board and director independence include the prevailing sense of gratitude in the minds of independent directors (IDs) for CEOs and controlling shareholders; IDs’ fear of losing board seat if they challenge the CEOs; and deliberate attempts by CEOs to create competency deficits in the boards.

- Some (additional) legal measures have been suggested; significantly, mandates for: (a) approval of election and compensation of IDs by a majority of non-controlling shareholders, (b) presence of majority of IDs for quorum of board meetings and for approving key resolutions; and (c) IDs resigning mid-tenure to explain the reasons for resignation to non-controlling shareholders.

- Deficiency in the area of board independence cannot be entirely addressed by regulations alone; CS and IDs need to walk the extra mile to address the issues.

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