Mumbai: Differing stances adopted by independent directors over the continuation of Cyrus Mistry as chairman of various Tata group companies begs the question: Do these individuals truly understand their role and do justice to it?
A critical cog in a firm’s corporate governance framework, independent directors are expected to walk the fine line between safeguarding the interests of minority shareholders and those of the promoters. However, typically, they have toed the line of promoter-shareholders.
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The stand adopted by the independent directors of some of the companies in the ongoing Ratan Tata-Cyrus Mistry spat, in that sense, is unprecedented. But experts and investors caution it shouldn’t be viewed as an assertion of their independence in the true sense; on the other hand, they have got drawn into a personality conflict and, in the process, may have compromised interests of the wider community of shareholders.
“This is not about independent directors showing their independence. It’s a personal fight between two individuals," said a top executive at a mutual fund, which has investments in several Tata group companies.
In a boardroom coup on 24 October, Mistry was removed as chairman of Tata Sons, the holding company of the $103 billion Tata group, and replaced by the group’s former boss Ratan Tata as interim chairman. This was followed by attempts by Tata Sons to eject Mistry from the post of chairman at several operating companies of the group, and the role of independent directors in these companies has come into sharp focus.
To be sure, Tata Sons calling for a shareholder resolution to remove Nusli Wadia, one of the independent directors from its boards, has only reinforced such arguments. “Singling him (Wadia) out adds fuel to the rumours that the differences are personality-driven, rather than issue-based," said proxy advisory firm Institutional Investor Advisory Services in a 15 November note.
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Independent directors at three among half-a-dozen firms—Tata Chemicals Ltd, Indian Hotels Co. Ltd, and Tata Motors Ltd—reposed faith in the management. While the first two put out statements supporting Mistry, Tata Motors has refused to be drawn into the Tata-Mistry spat, saying the company board was collectively responsible for all decisions relating to strategy and operations.
Springing a surprise on Mistry, the board of directors of Tata Global Beverages Ltd on Tuesday voted in favour of a resolution that sought his removal as chairman.
Regulatory provisions in India require listed companies to institute balanced boards with adequate representation of independent directors to strengthen the internal control mechanism and encourage greater trust between the company and its stakeholders. In some senses, in the Tata-Mistry spat, the spirit of the law has been overlooked, say experts.
J.N. Gupta, co-founder of advisory Stakeholder Empowerment Services, says that while there’s indeed a corporate governance issue at Tata group, by “ganging up" or “taking sides", the independent directors are creating bigger governance issues, he said.
As per Companies Act 2013 Section 149(8), if independent directors have concerns about the running of the company or a proposed action, they need to ensure that these are addressed by the board till they are resolved. Also, concerns need to be recorded in the minutes of the board meeting.
Some key obligations, says Tejesh Chitlangi, partner at IC Legal, seem to have been ignored by the independent directors in case of at least a few Tata companies. Citing instances of companies in which independent directors have opposed allowing the current chairman to continue, he said there is nothing on record suggesting that the independent directors in the past had raised any objections/concerns about the unsatisfactory conduct or functioning of the chairperson.
“Supporting the ouster of the chairperson suddenly is by no means a non-material event," said Chitlangi.
The company law further requires an independent director to not let any extraneous considerations impact his or her exercise of objective independent judgment in the interest of the company, while agreeing or disagreeing from the judgment of the board.
“I don’t think any independent director is truly independent. Very few people come on board based on merit," said the mutual fund executive cited earlier.
It is the compensation and incentive system that creates conflict of interest, says Sumit Agarwal, ex-Sebi official and Partner, Suvan Law Advisors. “It is unclear what prompts the independent directors to monitor and confront management, given that they are not significant shareholders, do not receive performance-based compensation, and often owe their appointment to the managers they monitor."
To be sure, the law governs that the so-called Nomination and Remuneration Committee which appraises the performance and compensation of the top personnel in the company including the chairman, should consist of three or more non-executive directors, out of which not less than half must be independent directors.