Are long-serving independent directors truly independent?

In 31 big firms, 88 independent directors have served their boards for more than 10 years, according to a survey
Comment E-mail Print Share
First Published: Sun, Sep 23 2012. 11 32 PM IST
CII president and Godrej Group chairman Adi Godrej says long tenure is good and doesn’t impair independence. Photo: Mint
CII president and Godrej Group chairman Adi Godrej says long tenure is good and doesn’t impair independence. Photo: Mint
Updated: Mon, Sep 24 2012. 06 03 PM IST
Mumbai: Can independent directors who have served on the boards of companies for more than a decade, some for more than 30 years, be truly independent?
Corporate governance experts fear the long association may make it hard for them to ask tough questions of the firms they serve. So does the government.
A provision in the draft companies law seeks to enforce a cap of 10 years on the tenure of an independent director and limit the number of such directorships to 20. Only 10 of these can be in listed companies.
The government wants to get the long-awaited legislation through Parliament in the winter session, although it may be difficult given the fate of the monsoon session, during which little business was transacted owing to protests by the opposition against the government over alleged wrongdoing in coalfield allocations.
photo
In 31 big Indian companies, 88 independent directors have served their boards for more than 10 years, according to a survey by Stakeholders Empowerment Services (SES), a proxy advisory firm. Companies such as HDFC Ltd, Tata Steel Ltd and Apollo Hospitals Enterprise Ltd have retained their independent directors for 33-35 years.
Current regulations stipulate a person can’t be a director at more than 15 listed firms, but there’s no restriction on tenure or on unlisted company boards.
“If the acquaintance has been for a long time, then promoters can influence directors a lot more. Independence may get impacted with a greater familiarity with system and processes,” said J.N. Gupta, founder of SES.
Four of the companies named in the SES survey replied to queries, while some declined to participate. The others didn’t respond to emailed queries.
Long tenure is good and doesn’t impair independence, said lobby group Confederation of Indian Industry (CII) president and Godrej Group chairman Adi Godrej on the sidelines of a CII conference on 18 September. “In fact, the longer a director has been on a board, the better his judgement gets.”
Hindustan Unilever Ltd has a “voluntary” 70 years retirement age limit for independent directors, said a spokesperson. Infosys Ltd said the issue was “widely debated” even globally. Both said they would comply with the law if it is changed.
V. Balakrishnan, chief financial officer (CFO) of Infosys, said the company has two directors who have served longer than 10 years. There are “pros and cons in fixing the tenure for an independent director” since a director could “lose his outside perspective due to a long association with the management”, but then “no relationship should affect a director’s judgement” with “an independent mind and character”, he said.
A Cipla Ltd spokeswoman said the directors “mentioned by you are senior professionals in the legal and medical field and, given their professionalism, (would) in no way...compromise on their independence irrespective of the number of years of association. The performance of the company for the last two-three decades in itself speaks of their contribution”.
Marico Ltd’s group CFO Milind Sarwate said a long-serving director who is independent “can actually be a much stronger commentator and intervenor in the company’s affairs”.

WHOM DO THEY SERVE?

Corporate affairs minister M. Veerappa Moily questioned the independence of such directors at the same CII summit as Godrej. “(Our) investigations (of companies) have shown that independent directors consisted of friends of the chairman,” he said.
A director should protect the interests of all shareholders, said Shailesh V. Haribhakti, who is on 13 public company boards. “We judge issues based on merit. It is a specious argument to say we are more responsible for this and less for that,” he said.
R.A. Shah is clear about the role. “We are not beholden to the promoters,” he said. Shah is a lawyer and an independent director on the boards of 13 listed companies including Asian Paints Ltd, Colgate-Palmolive (India) Ltd and Wockhardt Ltd. Shah has been with Colgate for 29 years and for 11 years with Asian Paints.
“If somebody has been on the board for years, they know the company inside out,” he said. “Caps (on tenure) defeat the purpose.”
One “cannot legislate integrity”, said Suresh Talwar, a lawyer on the boards of 12 listed companies including Larsen and Toubro Ltd and Biocon Ltd. “Anyone who has an independent mind will not compromise even as years pile on,” he said. The only benefit of a tenure limit would be a “fresh pair of eyes and fresh blood” coming on board.

YET, SOME VOTE WITH THEIR FEET

A case in point is that of the two independent directors in OnMobile Global Ltd who resigned this January, months before the management of the mobile value-added services company was criticized in a forensic report by consultants KPMG over alleged fraud. Subsequently, co-founder and board member Arvind Rao resigned in July.
Similarly, by end-March, all five independent directors had quit the board of debt-laden, cash-strapped Kingfisher Airlines Ltd as it struggled to pay employees, fuel suppliers and lessors.
And in March, UK-based hedge fund The Children’s Fund threatened to sue state-run Coal India Ltd’s independent directors for not protesting the underpricing of coal and long-term fuel supply agreements forced upon the miner by the government that would have hit profits. This prompted the independent directors to become more assertive.

ISSUES TO DEAL WITH

Being an independent director at several companies makes it difficult to do justice to the post, said Gupta of SES.
“If I’m a director of 15 companies and member of audit and some other committees, where is the time to do the work religiously?” he said. “Then it becomes a tickbox approach.”
Talwar said it was up to the companies to decide this. “Why cap the number of unlisted companies? What’s the problem there?”
He said, however, that there was a big gap between what was expected of independent directors and what could be achieved. “We are a minority on the board and can be outvoted in any case,” he said. “You cannot achieve miracles with independent directors. We are not the panacea for everything.”
Gupta also pointed to the inherent “conflict of interest” in independent directors somehow representing minority shareholders after being appointed by promoters.
Most boards in India don’t seek professional help in appointing independent directors, said Namrita Jhangiani, a partner with executive search company Egon Zehnder International.
“Promoters usually invite people whom they know or respect to the board. Sometimes they bring on their friends, families, or people from their community who will not ask uncomfortable questions about how the company is run,” said Jhangiani. Globally, Egon Zehnder advises companies looking to appoint independent directors besides evaluating boards.
The firm “typically would not recommend those who are overburdened with commitments of other directorships, particularly if they have any other executive commitment”, Jhangiani said.
Familiar faces tend to pop up on most company boards, said Arpinder Singh, a partner with consultancy Ernst and Young (E&Y) India and head of the fraud investigation and dispute services vertical.
“There is no scorecard on an ongoing basis, just a postmortem,” he said. “You evaluate an independent director only when something has happened.”
Gupta said there really is no way to assess a director on whether “he argued and discussed effectively or just ate cashew nuts” at a board meeting.
On the other hand, too much scrutiny may scare away candidates. “It’s very difficult to find good people for the job anyway. If they are evaluated publicly, then they would shy away even more,” he said.
Singh estimated that preparing for quarterly board meetings could take up a total 40 days in a year. Directors said it took less.
Shah said he spends about one day every quarter on a listed company (or four days in a year), “but most of my companies are professionally managed and headquartered overseas where most of the strategic decisions are taken”.
Haribhakti agreed with E&Y’s Singh that there was “a serious dearth of good independent directors” and “as a country, we’ll have to see how that pans out”, pointing to the proposed changes in the Companies Bill, which will spur a demand for more such executives.
“It is really not a supply-side issue as there are enough capable and educated people in India. Paucity is caused because of some specific networking abilities companies look out for—such as contacts in ministries, regulators, industry, etc.,” he said. “You can’t have a huge churn if you are looking at ex-bureaucrats, ex-customs commissioners or ex-bankers.”
Moily said the proposed companies law, which he described as a priority, would be passed in the winter session of Parliament.
Comment E-mail Print Share
First Published: Sun, Sep 23 2012. 11 32 PM IST
blog comments powered by Disqus
  • Wed, Oct 15 2014. 11 40 PM
  • Wed, Oct 08 2014. 03 02 PM
Subscribe |  Contact Us  |  mint Code  |  Privacy policy  |  Terms of Use  |  Advertising  |  Mint Apps  |  About HT Media  |  Jobs
Contact Us
Copyright © 2014 HT Media All Rights Reserved