Task is cut out for independent directors

But there are no provisions to remove non-performers

Independent directors on the board of central public sector enterprises (CPSEs) are supposed to bring an objective perspective to business decision-making, risk assessment and management practices. But until recently, their roles and responsibilities were not documented anywhere. As a result, there were instances of independent directors on the boards of key CPSEs failing to protect the interests of minority shareholders.

The Organisation for Economic Cooperation and Development?s (OECD) corporate governance guidelines, which are followed globally as best practices, stipulate independent directors have to protect the interests of minority shareholders.

The department of public enterprises (DPE) has now come out with guidelines to fix the responsibilities of such directors on the CPSE boards, holding out hope for improvement in the way corporate governance is implemented in CPSEs.

These guidelines could work as signposts for independent directors in matters involving conflicts between interests of promoters (that is, the government of India) and minority shareholders, as is seen in the dispute between the coal ministry and the UK-based hedge fund, The Child Investment Fund (TCIF), over pricing of coal supplied by Coal India Ltd.

The hedge fund has gone to the court against the coal ministry?s move to roll back the price hike announced in CIL?s coal price from January 1, 2012. It has also filed a suit against CIL.

CIL has been pricing coal on the basis of unit heat value (UHV). It shifted to gross calorific value (GCV) system on January 1, 2012. But since the switchover led to sharp increases in certain coal qualities supplied to power plants and necessitated commensurate tariff hike, the ministry asked CIL to roll back the move, fearing a political backlash.

TCIF, which holds between 1-2% stakes in CIL, cried foul over the ministry?s move, saying it was a violation of the corporate governance principle as the CIL board failed to protect its interests. It has brought a case against the coal ministry in the Delhi High Court.

Earlier, public sector oil major ONGC board too came under strong criticism from Goldman Sachs, a leading international equity investment firm, for the huge petroleum subsidy payout. The global investor questioned ONGC?s corporate governance practices by citing diversion of more than $20 billion of its revenue towards subsidy payout at the behest of the Indian government, the majority shareholder.

Goldman Sachs dubbed it a breach of minority shareholders? trust as their approval was not secured by the company. ONGC tried to counter the negative fallout of the Goldman Sachs? criticism by running a media campaign. However, the damage was done.

But now the DPE had made it mandatory for independent directors to protect the interests of minority shareholders, providing a big boost to investor confidence in public sector companies.

The DPE guidelines also stipulate these non-functional directors to independently review the performance of functional and government directors working alongside them on the CPSE board as well as the board chairman. These provisions, subjecting functional directors to performance evaluation, are expected to improve the board?s functioning.

Significantly, directors who are supposed to make crucial contribution in CPSE decision-making often come unprepared to the board meeting. This is because they hold similar positions in other companies and are unable devote enough time for all companies. The DPE guidelines put a limit on the number of positions such directors could hold. However, the guidelines have no provisions for performance appraisal of the independent directors. This is a major lacuna, according to experts.

They say that there are no specific criteria for the selection of independent directors on the CPSE board. These appointments are mostly made on political considerations without paying attention to the candidate?s expertise and ability to contribute to the decision-making process.

The appointments are made for an initial tenure of three years with a provision to extend it by two years. With no provisions to recall bad performers, independent directors do not have to worry about losing their job.

?There must be a ruling to call non-performing directors back,? said UD Choubey, director general, The Standing Conference of Public Enterprises (Scope).

Similar views were echoed by Monish Chatrath, a corporate governance expert at Mazars India. ?What is missing is a clear focus on an objective evaluation of the effectiveness of a company board?, Chatrath said.

However, DPE secretary OP Rawat justified the omission, saying: ?We have kept silent (on this matter) as this is a whole new concept and will be evolving over a period of time.?