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Spencer Stuart Perspectives | Playing by rules, independently

Spencer Stuart Perspectives | Playing by rules, independently
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First Published: Sun, Mar 23 2008. 11 54 PM IST
Updated: Sun, Mar 23 2008. 11 54 PM IST
As Indian companies grow in size, scale and complexity, and expand their footprint across the globe, it has become essential for Indian boards to uphold the highest standards of corporate governance and perform their roles effectively. As these companies participate in the global business arena alongside multinationals, and are quoted on the US and European exchanges, expectations on governance standards are set to rise further yet.
While corporate governance is a key issue in Indian companies today, how deeply the new Indian governance principles have taken root remains a matter of debate, especially when it comes to the concept of independence and the role of the independent director.
On the one hand, there is more widespread understanding of fiduciary responsibility and governance than even just five years ago and, thus, an evolutionary process has clearly begun. Also, today, on many boards, independent directors have greater influence on the board agenda.
On the other hand, there is a marked distinction between the theory and practice of independence. Moreover, for every company with good governance, there are 5-10 where agenda items are handed out the previous night or land on the table when the directors sit down at the meeting.
Another challenge is that, despite the existence of remuneration committees, Indian companies don’t publish the criteria for evaluating CEOs or executive directors and their level of compensation, something that is required in the US and the UK.
In India, the term limit for independent directors is nine years, beyond which they lose the designation of “independent”. This, however, is only a recommendation, and compliance is not obligatory. In the UK, a director is considered independent for up to nine years.
Assertive personality
Independent directors can be divided into three categories. First, those who are nominees of the chairman or the CEO, and who perform roles akin to that of “the nodders” in the P.G. Wodehouse short story of the same name—they nod whenever the chairman speaks. They are technically independent, but echo the sentiments of the chairman and the CEO.
At the other extreme are directors who are truly independent in the sense that they express their views clearly, fearlessly and frankly, regardless of what the chairman, or whoever has dictated their appointment, thinks. They take to heart Sam Goldwyn’s famous one-liner: “I want everyone to tell me the truth, even if it costs him his job.”
The vast majority of independent directors fall between these two extremes. These are people conditioned, to a large extent, by culture—the culture of not expressing dissent forcefully—and are therefore intimidated or unsure of how their criticism will be taken.
This problem is not unique to India, of course; around the world, there are board directors who say little or nothing in the boardroom, preferring, instead, to raise their concerns after the meeting. Unless this cultural reluctance to express constructive dissent around the board table is tackled, it would mean that boards aren’t contributing as they could be.
Effective role
The effectiveness of the independent director in India is influenced by several factors. The first is the nature of the company: Multinationals, minority shareholder companies, public sector enterprises, group-affiliated companies and entrepreneurial businesses will expect and tolerate varying degrees of involvement by independent directors, something that should always be taken into account when considering a directorship.
The second is the circumstances surrounding the appointment of independent directors. These have a marked effect on the way directors go about their duties.
Directors appointed via the “old boy network” are more likely to be brought on to a board for reputation reasons rather than to provide an objective, critical perspective on key issues.
In the US and the UK, independent directors are always selected by a nominations committee following a rigorous search process. In India, few companies go through such a formal process when appointing independent directors to their boards.
It is also worth noting that the independent director’s responsibility is not limited to the boardroom. Indeed, it is estimated that 50% of the work should take place outside the boardroom. This work involves softer skills; for example, maintaining a watchful eye on what is happening to the company, interacting informally with other independent directors, the chairman, or even with key members of the executive team, to get a sense of the challenges they face, and to learn about their aspirations for the future of the business.
The implication of this extra work is that there is a limit to the number of boards any independent director can sit on and do justice to the companies he or she serves. Thus, over-committed directors should reduce the number of boards they sit on.
To be fully effective, independent directors should prepare well for board meetings, but they must also be adequately informed and briefed about the company—only then are they in a position to comment on significant issues, including the company’s vision or strategy. Often, a disproportionate amount of board time is spent reviewing management presentations, leaving little time for actual discussion among board members.
Independent directors sit at the apex of commercial organizations that have to deliver results. It is sometimes easy for directors to become disruptive in pursuit of their statutory responsibilities. Therefore, it is critical to a company’s success for directors to strike a balance between governance oversight and constructive support to the management.
Counting gains
In essence, the task of independent directors is to ask common sense questions—to do with company strategy, evaluating the performance of the CEO and measuring the contribution that he or she makes. If selected objectively, they also ensure that board meetings are conducted transparently and fearlessly. They bring in unique perspectives and skills, which companies leverage, using them for networking and opening newer vistas.
Most importantly, it is also incumbent upon independent directors—and, indeed, boards—to articulate their objectives and keep these in their sights at all times, ultimately benefiting the companies they are associated with.
Anjali Bansal is managing director at Spencer Stuart India.
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First Published: Sun, Mar 23 2008. 11 54 PM IST