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Business News/ Opinion / Making Indian boards truly independent
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Making Indian boards truly independent

Sebi's new norms for directors will help improve corporate governance

Illustration by Jayachandran/MintPremium
Illustration by Jayachandran/Mint

The loud debates about crony capitalism continue to echo along the election trail. The question of whether large Indian companies have an unhealthy influence on governance is undoubtedly an important one, but the national discussion must also embrace the other significant question about how these large companies are internally governed: for the benefit of all shareholders or only the promoter group that dominates management?

The new corporate governance norms made public by the Securities and Exchange Board of India (Sebi) earlier this month attempt to strengthen oversight of companies by their boards of directors. Independent directors have quite rightly attracted a lot of regulatory attention. Two key changes in the guidelines are limits on the tenure of independent directors on the board of a company and the number of directorships any person can hold across firms.

Independent directors have no executive functions and are expected to serve as a reasoning board for the management as well as protectors of the minority shareholders invested in the firm. They are not supposed to have any material relationship with the company or related personnel.

By limiting the tenure of independent directors to two terms of five years each and restricting the number of directorships they can hold at a time to seven, the regulator wants to ensure that the so-called independent directors remain truly independent and do not become too close to company managements.

An analysis by this newspaper shows that some of the best Indian companies have boards with independent directors who have served too long to be seen as independent—some for as long as three decades at a stretch. Their objectivity will be quite naturally in the shadow of doubt. In the US, the Securities and Exchange Commission allows an independent director to serve one term of five years at a stretch followed by a two-year cooling off period. These directors can then come back for another five year-term before becoming permanently ineligible to serve on the board of that company.

The new norms for independent directors are welcome. Indian boards have not been independent enough. One has to only go over what has happened over the past decade: family squabbles over control of large companies, expensive global acquisitions, corruption scandals involving listed companies, and borrowing binges that have taken companies close to bankruptcy. It is hard to find even a single instance of a corporate board—and its independent directors in particular—asking tough questions to the senior management and promoters.

The new rules put in place by the securities market regulator align its framework for corporate governance with that in the Companies Act, 2013: both seek to strengthen board oversight through the independent directors. The changes will undoubtedly lead to churn in corporate boards. At least a quarter of the 220 independent directors on the boards of the Nifty 50 firms (whose tenure data is available on Bloomberg) will have to be replaced. The number of new independent directors required is bound to be far larger as the top 50 firms by market value comprise but a fraction of the more than 4,000 listed companies on the National Stock Exchange (NSE).

The other new rule about having at least one woman director on the board of each listed company provides room for that woman to be an independent director, following the lead of some of the Scandinavian countries that have tried to enforce gender diversity in corporate boards. Some studies on this subject suggest that women leaders tend to be more ethical than their male counterparts. Yet where will these new women independent directors be sourced from remains to be seen as there are only 174 women who occupy such positions at present among the NSE-listed entities.

It is important that Indian companies do not game the system once again. Some have appointed cricketers or film stars to their boards in the name of diversity. Similar meaningless appointments can be made to fill up the gender quota, similar to the fears expressed by some critics of the attempt to reserve seats in Indian legislatures for women. Capacity building will be a big challenge as companies rush to appoint new independent directors in the coming years.

Indian boards have overall been passive spectators. The change that is being sought is thus overdue. The change in the Indian corporate governance framework should be seen as an important part of a bigger reform agenda on how important institutions in the country are run.

After all, as management theorist Peter Drucker never tired of pointing out, large corporation is a key social institution in the modern world.

Can corporations be regulated to uphold shareholder interests? Tell us at views@livemint.com

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Published: 24 Feb 2014, 06:29 PM IST
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