Remaining Independent on a board
BS Reporters / Mumbai July 25, 2011, 0:52 IST
Can independent directors (IDs) who exceed nine years on the board of listed companies remain ‘unbiased’ and protect minority shareholders’ interests?
Managements believe it’s possible. They maintain that Clause 49 of the Listing Agreement — annexure ID (1) — which specifies a maximum tenure of nine years for IDs, is a non-mandatory guideline. However, lawyers argue that companies should comply with these guidelines to provide good corporate governance, even as companies counter that there’s a shortage of good IDs, forcing them to reappoint the old ones, thus violating the guideline in spirt.
In some quarters, resentment is building against such appointments. Bangalore-based InGovern, a proxy advisory, has recommended shareholders vote against the reappointment of two IDs, Shardul Shroff and S H Khan, on the board of IDFC during the company’s annual general meeting (AGM). Shroff was appointed on December 1, 1997, and has been on the board for a period exceeding nine years, in violation of Clause 49. Khan was appointed on February 11, 1998, and is serving on the board of IDFC for over 13 years. “Shroff is also a member of the audit, risk and the compensation committee,” notes Shriram Subramanian, managing director of InGovern.
Shroff’s is not a lone case. Nusli N Wadia, Chairman of the Wadia Group, who joined the Tata Motors board as an ID in 1997, is seeking reappointment. Nadir Godrej (MD of Godrej Industries who joined in 1992) and M M Murugappan, (chairman of Carborundum Universal, Tube Investment of India, who joined in 1992) are seeking reappointment on the board of Mahindra & Mahindra.
Deepak Parekh (chairman, HDFC) is seeking re-appointment in the upcoming AGM of Indian Hotels. He joined the board in 2000. And K U Mada (worked with 27 years with RBI and IDBI, where he was the ED) who joined the Hotel Leelaventure board in 2000, was reappointed at the company’s recent AGM. So was Anna Malhotra (retired IAS officer, secretary of ministry of agriculture and chairperson of JNPT) who joined the Leela board in 1993.
For & not
When asked, Nadir Godrej countered: “I really don’t think there is any relevance of that clause (Clause 49) in today’s times. A person with experience should be allowed to continue as an ID. I have not looked at the legality, whether or not Sebi can do anything about the clause.” Reacting to Wadia’s reappointment, a Tata Motors spokesperson said: “The clause (Clause 49) that you cite is a non-mandatory requirement. The Tata Motors board deliberates on tenure of directors. The board is of the view that the significant contribution of IDs, even though they have completed nine years, is of critical importance to the company.”
B S Nagesh, vice chairman and non-executive director, Shoppers Stop, an ID on the board of Marico, also believes “it’s a board and organisation’s call. It (not retaining the IDs after nine years) is like saying a managing director should not be there for more than nine years. Within the rules of corporate governance, the chairman should take a call.” Adi Godrej, vhairman of Godrej Group, opines that “since there is a shortage of IDs in the country, senior directors can add a lot of value to companies. Personally, I do not think it is a violation.”
Subramanian of InGovern counters “there’s no dearth of IDs. Why don’t they take foreigners on board as IDs? If FIIs can invest, this is surely possible. Besides, the top 500 companies need just around 3,000-4,000 IDs, asssuming one director sits on around 10 boards. Is it so difficult to find good IDs in India?”
Prime Database’s chairman & managing director, Prithvi Haldea, believes that in most cases, IDs “are not independent”.
“They are chosen by promoters based on some comfort level with the person who is appointed.” That itself is self-defeating. From day one, there is potential bias in the mind of the ID. Hence, the point that there should be a limit has no validity. An outside agency cannot nominate IDds because promoters will not accept an unknown person as a board member.”
Simply because there is risk of leakage and he can do damage to the company.”
Ashvin Parekh, partner (national industry leader for global financial services), Ernst & Young, acknowledges “it (independent directors exceeding the Sebi guideline) has became an issue of compliance. Independence of a director gets more impaired by the benefits he gets, rather than the tenure. The regulator should put in place a larger framework for appointing an ID and emphasize more on professionals as an ID”. Haresh G Ganatra, advocate, Mumbai high court and solicitor, Supreme Court of England, concurs with this point of view, adding: “IDs are essential to maintain checks, besides keeping a balance that is necessary between corporate aspirations and protections of investors/ shareholders.”
Meanwhile, the government is expected to tighten things. It is reportedly reaching out to rival political parties to sort out differences on the Companies Bill to ensure smooth passage of a legislation aimed at overhauling corporate governance norms and granting shareholders greater powers to defend their rights. The Bill is expected to be taken up in Parliament during the monsoon session, which will begin on August 1.
And, this June, the Standing Conference of Public Enterprises (Scope), the apex body of public sector undertakings (PSU), said it would develop a matrix to develop professionalism in IDs of state-run companies. According to U D Choubey, director general of Scope, the matrix will determine the working culture of PSUs, including the number of IDs on boards, their succession plan, attracting talent and retaining them, selection process, domain expertise and accreditation. At present, by Sebi guidelines, half the board members should be IDs. However, SCOPE, on behalf of PUSs, has been requesting the government to reduce the cap to a third.