The Hindu Business Line : Independent directors

HAVING independent directors on the Boards of listed companies had long been an accepted canon of good and sound corporate governance. However, how independent is independent is a puzzle that has not been solved to anyone's full satisfaction. For, those invited to be independent directors, unless nominated by the regulatory bodies themselves, whether the entrenched insiders liked them or not, are bound to feel a sense of obligation to those managing the company the moment they are inducted.

There is every chance of this inhibiting them from taking an aggressive or uncompromising posture when confronted with unethical, irregular or even dishonest practices.

Further, company chairpersons and their cohorts are adept in "taking care" of directors and making them feel like nabobs by lavishing on them luxurious perks and privileges — bashes in five-star hotels with no holds barred, shining limousines, expensive gifts, you name them. So much so, ordinary individuals not endowed with superhuman qualities, are swallowed by the system and rationalise to themselves their acquiescence with the goings-on.

Assuming, nevertheless, that the desired degree of independence will be preserved by such directors, there has been no certitude over the right number that would conduce to optimum effectiveness without being a deadweight on the board. The SEBI had prescribed in its famous Clause 49 of the Listing Agreement that independent directors should constitute at least half of the Board, while the J. J. Irani Committee on Company Law set up by the Ministry of Company Affairs wants it cut down to one-third.

It can easily be the one or the other. In the US and the EU, for instance, the number is required to be "significant" and "adequate", the only condition being that the audit committee should be composed entirely of independent directors.

The advantages of the higher number is the enriching of the deliberations by a broader spectrum of experience and expertise, bringing to bear on proposals and decisions the necessary scrutiny and vigilance, ensuring the presence of different independent directors in different committees and the moral pressure that these factors will exercise on the company executives at all levels.

B. S. Raghavan

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