Firms say long tenure does not affect directors’ independence5 min read . Updated: 27 Nov 2014, 09:42 PM IST
Executives say new rule on the issue is reactionary and that it has made things more challenging
Mumbai: As a 33-year-old, Rajendra Ambalal Shah, who had a law degree, joined the board of consumer goods maker Procter and Gamble Hygiene and Healthcare Ltd (formerly Richardson Hindustan Ltd). Today, after 50 years, he remains on its board and serves as chairman.
Shah, who is a senior partner at law firm Crawford Bayley & Co., holds seven independent directorships, and the average tenure he has spent on those boards amounts to 41 years.
But the distinction of being the longest serving independent director goes to 80-year old Klaus Uebel. Uebel is the proprietor of German hoisting equipment maker Heinrich De Fries GmbH, and he has been on the board of Hercules Hoists Ltd, a Bajaj Group company that makes hoisting equipment, for 52 years.
These examples show the tenure of independent directors has not been of much consequence in the history of corporate India, but the Companies Act of 2013 has changed that.
In its new avatar, the law has questioned the unchecked tenure of directors and has mandated two successive five-year terms, after which they can come up for a re-appointment only after three years.
Like Shah and Uebel, there are 362 independent directors in 285 companies listed on the National Stock Exchange, who have spent over 20 years on the board of a company.
And 852 independent directors have spent over 10 years in 388 companies listed on the National Stock Exchange, according to indianboards.com, a database on the boards of companies listed at NSE.
These include Housing Development Finance Corp. Ltd, the country’s oldest mortgage financier, which has six independent directors who have served over 10 years each.
The two key changes in the guidelines came in the form of restricting the number of directorships a person can hold across firms to seven from the earlier limit of 15. And secondly, by limiting the tenure the regulator wants to ensure that the independent director remains truly independent and does not become too close to the promoter and the company management.
However, many top executives at Godrej Group, Dr. Reddy’s Laboratories Ltd, Mahindra and Mahindra Group and Lupin Ltd feel the length of the tenure does not affect the ability of a director to remain independent.
“Length of the tenure has nothing to do with independence," said Adi Godrej, chairman of the Godrej Group. “All you need is a person to be logical. Some of the most independent directors have been close family members. It depends on the individual’s character."
For Satish Reddy, chairman of Dr. Reddy’s Laboratories Ltd, the tenure of an independent director depends on the context of where the company is.
“When we brought in Omkar Goswami in the year 2000, we were listing in the New York Stock Exchange, and we needed an expert like Goswami to guide us on corporate governance. His skill set is relevant even now in the changing landscape of corporate governance norms," explained Reddy.
Prince Augustin, executive vice-president, group human capital & leadership development, Mahindra & Mahindra Ltd, and Ramesh Swaminathan, chief financial officer of Lupin Ltd, say that in some cases, longer tenures help independent directors make better judgements, as they have spent a considerable amount of time understanding the company.
Even independent directors like former ICICI Bank Ltd chairman Narayanan Vaghul say the tenure is not relevant to being independent.
“There can be people who are not independent from day one, while there are others who can be independent even after 10 years. Tenure is not going to determine the sanctity of independence, but the quality of the director is," said Vaghul, who has been on the board of Wipro Ltd for 17 years.
Executives called the new rule reactionary and believe it has made things more challenging.
“There is a limited pool of prominent board-quality people. As it is people don’t want to join boards any more, and those who are available will rather be on boards of big companies," said Shekhar Bajaj, chairman of Hercules Hoists Ltd. “On top of this, the people on our boards have to leave just because they completed 10 years," he said. “It makes no sense."
Most independent directors, Reddy said, are chosen because of their eminence in a field, their track record and what they bring to the table.
While independent directors are respected when they make competent suggestions, T.V. Mohandas Pai, chairman of Manipal Global Education, and former board director of Infosys Ltd, questioned how many of them actually spend the time and effort to understand a company and its business.
“In most companies with controlling shareholders, have you seen or heard of any resolution turned down, or seen any sign of independence?" asked Pai.
Many times the only sign of a dissenting independent director is when he or she quits the board, said Pranav Haldea, managing director of Prime Database, a research firm.
In 2012, two independent directors of OnMobile Global Ltd resigned months before the management of the mobile value-added services company was criticized in a forensic report by consultants KPMG for alleged fraud. Subsequently, co-founder and board member Arvind Rao resigned in July 2012.
Similarly, at UB Engineering Ltd, in what started with resignation of two independent directors, B.K. Agarwal and B. Viswanath, in December 2013, the entire board except its managing director J.K. Sardana, quit by March.
Sardana was charged with non-payment of statutory dues of about ₹ 35.31 crore.
The rule on directors’ tenure took effect in April this year but, as Haldea points out, it is being done on a prospective basis, which means that this provision would take effect only after 10 years.
“Effectively, no new independent director faces are likely to be seen at least for the next 10 years as a result of this provision," said Haldea.
Shriram Subramanian, managing director of InGovern Research Services Ltd, a proxy advisory firm, said newer members are needed for a fresh pair of eyes and fresh ideas. “Tenure of a board member is a key determiner as we need fresh ideas," he said.
But the problem lies in the fact that managements love long tenure directors, as they are a source of strong support to them, Pai said.
Globally, too, only few countries such as France, Hong Kong, and Singapore have a cap on directors’ tenure. A March 2014 Wall Street Journal report said France prevented directors from qualifying as independent after sitting on a board for more than 12 years. And Hong Kong has a nine-year limit on the tenure of external directors unless shareholders vote for an extension. As Pai said, long serving independent directors do not necessarily imply that those companies suffer from improper corporate governance, but when people serve long tenures, it is difficult to believe they would be independent.