One of the most important recommendations made by the Birla Committee on Corporate Governance concerns the appointment of `independent directors'.The committee has observed that the executive directors are involved in the day to day management of the companies while the non-executive directors bring external and wider perspective and independence to the decision making. The committee has defined an `independent director' as, `a director who apart from receiving director's remuneration does not have material pecuniary relationship or transactions with the company, its promoters, its management, or its subsidiaries, which in the judgement of the board may affect their independence of judgement.'It is interesting to note that though the committee has taken cognisance of the fact that most of the companies in India filled their boards with representatives from the promoters group and has also acknowledged that the so called `independent directors' were handpicked in many cases, thereby ceasing to be independent. But the committee has opined that this scenario has undergone a change and increasingly the boards comprise of promoter directors, executive directors and non-executive directors, a part of whom are independent.
One cannot fault the intentions of the committee which comprised of very eminent persons, but it is difficult to agree with this observation of the committee as only a small number of large successful companies have independent directors on their board, while most are still continuing in the same manner as before. A close observation would indicate that in majority of the companies the so called `independent directors' have preferred to be a friend of the promoters rather then be the watch dog of the board. It should not be forgotten that the `independent directors' owe their seat on the board to the promoter group, this is hardly a healthy way of appointing independent directors.
The basic issue which the committee has not addressed relates to the mode or machinery for appointment of `independent directors'. Who will appoint independent directors? Will the same old system continue to operate or can there be some changes in this system? As is known, the corporate form of democracy is based on the principle of `rule by majority'. Hence, those who control the majority voting power in a company would also control the membership of the board.
In other words,the group that controls the management will have its nominees elected on the board and they would hardly be expected to be really independent. How can the independence of a director be assured if his very appointment and continuance on the board is at the mercy of the controlling group. Unfortunately, in the past the experience has indicated that even some well known public figures with impeccable background have failed in their duty in acting as `independent directors'.
However, this does not mean that there are no professionals who cannot stand up for their principles. One recalls the famous case of leading air conditioner manufacturer Voltas Ltd, which had a no nonsense SS Tinaikar, retired municipal commissioner, as an independent director on its board. Tinaikar had strong differences with the executive chairman of the company on certain issues of vital interest to the company, as he was not satisfied with the response of the management to the various issues raised by him, instead of a being a dummy director, Tinaikar preferred to resign from the board.
Another interesting case, though not directly related to the issue of independent director, but nevertheless affecting corporate governance concerns a leading travel company listed on Bombay Stock Exchange. As mentioned in the notice of the company convening its 23rd AGM held on April 19, 2000, the present executive chairman of the company was due to retire with effect from December 31, 2000. However, the company proposes to appoint him as the non-executive chairman from January 1, 2001. Nothing wrong in appointing the executive chairman as non-executive chairman on his retirement. However, there are certain notable aspects of this proposed appointment, which are normally absent in similar cases and they are:
The non-executive chairman will be a non retiring director.
He will be provided rent free accommodation for which the company will pay Rs.1.50 crore as deposit to the licensor.
He will perform such duties and exercise such powers as may from time to time be assigned to him by the board of directors of the company.
He will be entitled for commission and sitting fees.
There will be an agreement to be executed between the company and the said non-executive chairman.The company has declared that the concerned director in question would be the non-executive chairman, which means he will not be a whole time director. It is a different matter that the terms of appointment may perhaps give a feeling that as if the person in question is being appointed as a whole time director. May be this could be the precursor of many such cases that may follow in the coming days.
Hence, the question which needs to be addressed in this context is, Are the promoter groups prepared to make themselves accountable to outsiders who have no pecuniary stake in their company but are interested in the orderly management and success of the company as a whole and not just that of the promoters? The committee has rightly observed that the independence of the board will be critical for ensuring that the board fulfills its oversight role objectively and for holding the management accountable to shareholders.
However, to achieve this goal it is necessary to initiate multifarious measures starting with bringing about change in the attitude of promoters and convincing them of the advantages in the long run of making themselves accountable to outsiders. At the same time it is necessary to strengthen the law so as to ensure that the guilty managements are brought to book without delay and denied the fruits of their wrong doing. Similarly, the medium of listing agreement should be used to strengthen the hands of stock exchanges so that they can take action against defaulting managements.
There is no doubt that the time has come for the companies to change and change quickly before they are overtaken by the events. Companies who want to use public funds should have transparent management and should be totally accountable for their actions. It should be noted that eventually the market will be the final arbiter and it will reward the companies who are conscious of their responsibility towards stakeholders.
The author is a company secretary and his email at sdisrani@usa.net
Copyright © 2000 Indian Express Newspapers (Bombay) Ltd.