Board games: Making directors independent

The concept of independent directors (IDs) found its genesis in the waves of corporate governance drive. As the Companies Act, 2013, sought to bring about better corporate governance with increased transparency and accountability, the independence of Board of Directors got the serious attention that it deserved, but not without vulnerabilities. In the recent past, companies which were for the long quintessence of good governance, have been making news for wrong reasons. Recent episodes have marked the expulsion of a group chairman, a headlong resignation of another, questionable corporate dealings, the presence of mere paper directors, allegations of exit pay and promoters trying to acquire premium real estate from the company at prices, not at arm’s length.

The Ministry of Corporate Affairs (MCA) has come out with much-needed stricter norms for removal of IDs, wherein directors appointed for a second term can now be removed only by a special resolution passed by shareholders.

The order of the MCA, though a welcome step, is a half-hearted attempt nonetheless. It seems incongruous that a person retaining his/her position at the mercy of majority is given the duty of protecting the minority. The removal of an ID should be subject to the special majority, irrespective of his/her first or second term. Alternatively, have a dual step procedure, whereby there be a mandatory requirement of minority approval, wherein the minority shareholders or a certain percentage of minority approves such ouster.

An ID should be able to express unfettered views, without the fear of being expelled in cases of opinions which are not in alignment with that of the controlling shareholders. Still, at a precarious position, a holistic overhaul is required to protect IDs, starting with the selection process.

The process for the selection of IDs, ideally the prerogative of an unbiased nomination committee, is often influenced by prejudice and propinquity to management, or a majority shareholder. Such appointees may lack the courage to speak freely as their appointment and continuation in office remains heavily dependent upon such majority or controlling shareholders. In such a scenario, it is desirable to have a compulsory disclosure norm that declares how a candidate was selected as an ID and the person who recommended the candidate and reasons for selection. Such disclosures should list the qualification criteria set before the process began and the qualifications which the appointed director possesses. For this, services of specialised search firms to identify the names of such IDs with adequate qualifications should be encouraged. It would also be prudent to have a minimum remuneration prescribed for IDs under the law, which is not left to whims and fancies of the management.

Further, objectively seen, it may be difficult to maintain arm’s length relationship over a decade of association with a company for IDs. It is desirable that there should be a continuous evaluation procedure and IDs’ re-appointments should be subject to their participation the preceding tenure. Provisions may be amended to provide that in case an ID has not attended at least 50 per cent of the meetings of the company in the previous tenure, he/she should not be eligible for re-appointment. The performance evaluation report annexed to explanatory statement of notice of general meeting in which the ID is proposed to be reappointed, should be structured to disclose how each of them have contributed to various deliberations and decision-making process in meetings of board and committees.

Further, it is seen that it is not only the removal but also resignations before the expiry of normal tenure often leave the market in a state of uncertainty, as the stakeholders feel blindsided in absence of clear reasons for such sudden departure. It will be worthwhile to have an exit interview process, conducted by the management or by rating agencies, from which the company has received accreditation. There should a requirement that ID with his resignation furnishes a detailed statement explaining his reasons for resignation, along with confirmation that there are no other material reasons other than those set out therein. Such disclosures should be made a part of company records and corporate governance reports.

A holistic overhaul is required to protect independent directors, starting with the selection process