Sucheta Dalal :Your Time's Up Mr Director! (14 April 2003)
Sucheta Dalal

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Your Time's Up, Mr Director! (14 April 2003)  

At the Confederation of India Industry’s (CII’s) annual session for the western region, Rahul Bajaj spoke on the agenda for achieving 8 per cent growth. But typically, he digressed to the state of corporate governance in India. He talked about how the existing Securities and Exchange Board of India-mandated corporate governance code is on par with the best in the world and, in some ways, even better.

Then he touched upon the Naresh Chandra committee and N Narayana Murthy committee recommendations. Bajaj felt that “his friend” Murthy had gone too far in recommending that an ‘independent director’ cannot remain on a company’s board for more than three terms of three years each. And, if management insists that that he may remain on the board, he would not be considered “independent”. Bajaj thought the recommendation to be absurd. He didn’t think that a code mandated by a regulator should stop a company from having the same director on its board for several decades and still claim that he was independent.

Since it is no secret that Mr Bajaj’s opinion carries a lot of weight with the CII, one is not clear whether CII would follow it up with an official stand. Incidentally, the CII was well-represented on the Murthy committee, although CII chairman Ashok Soota chose not to attend any of the meetings. But let’s examine the issues raised by Mr Bajaj.

Even he would agree that most Indian companies have adopted our corporate governance code in form, while even the blue chips have vitiated it in substance. They have ignored shareholder interests, indulged in price rigging and manipulation or circumvented rules and procedure to further their interests. Having a good code in place is not enough, that is why Sebi appointed the Murthy committee to come up with refinements.

On the issue of independent directors, the Murthy committee has two recommendations. First, that there will be no “lenders’ nominees” on the board. If lenders insist on representation, the directors will have to be elected at the general body meeting (a procedural formality) as independent directors. Moreover, they will have to represent the interests of all stakeholders (which is the tough part), not merely the lenders. Second, ‘independent directors’ will have fixed terms after which they would quit the board. The idea of having a fixed term was to ensure that there was no incentive for them to stop being independent. In fact, not having a limited term kills the very concept of independence.

Independent directors are expected to act as guardians of stakeholders’ interests. At the same time, companies shower them with such high fees, sitting fees and perks that it could end up killing their independence. This is not a hypothetical fear. Everybody, including Mr Bajaj, knows how difficult it is to dislodge a director from a corporate board even where there were no fat fees. Geriatric directors have had to be wheeled into board meetings but wouldn’t quit; others have slept through meetings and some haven’t been able to hear board proceedings. I know of several anecdotes when blue chip companies have resorted to intricate manoeuvres to get senior directors to resign without hurting them too much.

Another problem that afflicts corporate directors in India is their in-ability to disagree with the management. On the rare occasion that they do, the directors simply quit and the management (owner-management in India) gets its way. This too makes it healthier for companies to be forced to change their ‘independent’ directors every nine years or so.

One thought that Indian companies would have welcomed the chance of getting new faces and ideas on their boards every decade. Instead, they worry about not finding enough ‘people like them’ to populate their boards. And since this cabal of acceptable people does not extend beyond a few 100 people, they complain about not finding the ‘right’ people.

In fact, the Murthy committee does not suggest that ‘independent directors’ vanish into the blue nine years on. They can go to other boards and help create a pool of good directors that other companies would love to grab. An invitation to Infosys’ board is most coveted today, but it wasn’t so a few years ago. HDFC chairman Deepak Parekh actually turned down Murthy’s invitation to his board — a decision that Parekh has publicly said he regrets. There will be other Infosys-like companies out there, that would stand to benefit if experienced directors are available to grace their boards.

Strangely, at the same CII meet, speakers extolled India’s knowledge power, the quality of our Indian Institutes of Technology and how “people are our strength”. Yet, Corporate India would have us believe that we suffer from an acute scarcity of decent, educated individuals of integrity, who know enough about the working of companies to take on the fiduciary responsibility of an independent director.

While opposing a fixed term for independent directors, Bajaj and others may also like to ponder over other developments. Investor activists in the US including Council of Institutional Investors and the California Public Employees Retirement System are pushing for the right to nominate directors to elections and are asking the Securities Exchange Commission to ensure that shareholder democracy is not an oxymoron. In India, a few investor activists want mandatory appointment of investor nominees on boards. Then there is labour minister Sahib Singh Verma who wants a law enacted to ensure 25 per cent of corporate boards are represented by workers, even when he thinks nothing of abusing airline staff.

Corporate India has to realise that companies will face increased scrutiny over their board appointments. Given other possibilities, asking for the rotation of directors every nine years is certainly not ‘going too far’, in fact, it is hardly a hardship at all.

-- Sucheta Dalal