Column : Abolish independent directorship

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: The board of directors is one of the instruments designed to ensure good corporate governance. When the management is led by the promoter, the board is required to ensure that the promoters and management do not compromise the interest of other sharesholders. To enable this, one-half of the members of the board are independent.

In reality, companies abide by this requirement only in letter and not in spirit. Independent directors are chosen by the promoters and almost invariably fail to think or act like watchdogs. Sometimes, promoters choose them to be polite and in the rare cases where the promoters genuinely desire to have an actively critical set of independent directors, they face a paucity of directors with skills and guts. As a result, independent directors mostly cooperate with the promoters. Often, they suggest that the company hire more auditors, lawyers and consultants to suggest solutions to problems. This partly reflects their lack of expertise on all matters that go into the running of a company and also because it is safe.

At the far end of the spectrum are the entrepreneurs that systematically cheat. We need to save the minority shareholders from these sharks. But they know how to manage a board half full of respectable independent directors. Good entrepreneurs would do none of this. But, they do not require independent directors because they do not indulge in fraudulent practices. Thus, the stipulation that one-half of the directors on the board of a listed company should be independent serves no purpose. Worse still, it provides a false sense of protection to shareholders. Thus, the Sebi mandated stipulation that one-half of the board should comprise of independent directors should be dispensed with.

The board of directors should consist principally of representatives of the various stakeholders in the company—essentially, the equity shareholders and it should have a representation of independent professional accountants and lawyers. Here is a set of proposals to constitute the board in the absence of independent directors.