Corporate governance has been the buzzword ever since the Satyam fraud came to light in January. Companies, consultants and regulators have waxed eloquent about this concept, but now they face a serious issue: Independent directors are leaving in droves. So what is to be done?
Directorsdatabase.com, a joint venture of Prime Database and Bombay Stock Exchange, reports that 265 independent directors have quit 211 company boards since January. This mass exodus has spooked the market regulator, the Securities and Exchange Board of India (Sebi), which has now sought counsel from one of its advisory panels.
This is a thorny issue, one compounded by last month’s controversy surrounding investment banker Nimesh Kampani. Andhra Pradesh authorities have charged Kampani for the failure of Nagarjuna Finance, a company on whose board he served as an independent director, to pay back depositors. In most business circles, this charge is now being seen as a travesty. True or false, the charge has rejuvenated the question about independent directors, although from a different angle.
Satyam showed independent directors, who knew nothing or did nothing about the company’s fraud, in negative light, and provoked a media and public backlash against such directors. The scandal prompted an important question for regulators: Are the rules and regulations governing directors too lax? Kampani’s story prompts the opposite question: Are some rules too harsh?
Regulators will have to think through these questions. While independent directors can’t be held liable for matters that don’t reach the company’s board, holding them accountable for issues under the board’s purview is fair game. A recent Prime Database report noted that 75% of independent directors are the promoters’ relatives or friends.
This makes mockery of Sebi’s 2005 Clause 49 that underscored corporate governance, and later mandated that independent directors comprise as much as 50% of a board.
But this doesn’t mean such directors are useless. The Satyam scandal may have exposed flaws, but its recovery has shown that decent hands at its helm, à la Kiran Karnik and Deepak Parekh, can make a real difference.
What should Sebi do about independent directors? Tell us at email@example.com