What makes an Independent Director truly independent?

Updated: May 26, 2021 4:45 PM

My own ID journey started around the issue of my independence. The first invitation, following my early retirement from KPMG, was from a current client of the firm.

Being an ID is much more than attending Board meetings.

By Sridar Iyengar

As I enter my nineteenth year as an Independent Director (ID), I thought of penning my thoughts on the – I who is an ID, a special breed of people charged with overseeing a practice of transparent governance in the corporate sector. Recently the role of the IDs, particularly its independence from the persons it is meant to oversee, has come under both regulatory and public scrutiny. That is welcome but most of the suggested solutions are on prescriptive measures to evidence independence rather than educating those who are or want to be IDs. For me, independence is a state of mind and attempts to enforce and police it by rules will provide compliance without conviction.

My own ID journey started around the issue of my independence. The first invitation, following my early retirement from KPMG, was from a current client of the firm. I was involved in that account until I left India and the partners and senior staff on the account were all persons I had approved as head of that firm. I saw multiple issues around independence, initially declined and eventually accepted the invitation after the NASDAQ stipulated three-year waiting period was satisfied.

So, I was acutely aware of the need to exhibit my independence from them and the company. In my previous avatar, I had attended many board meetings but those were in a specific professional role, supported by staff with clear boundaries for interaction. As an ID, I knew I was on my own. So, I decided to prepare myself by reading as much as I could about the role of the board and particularly the audit committee which I was asked to join. 

Soon after I joined my first Board, I attended a seminar at Stanford University on board governance and role of an independent director. The highlight of that seminar for me was this statement from Chief Justice Veasey of the Delaware Supreme Court who said “Directors who are supposed to be independent should have the guts to be a pain in the neck and act independently”. Those words are always in the back of my mind as I sit at board meetings. I also see independence and avoidance of conflicts, personal or otherwise as complementary attributes.  A fellow partner once gave me sound advice that conflicts, suggesting a lack of independence, “can be cleansed by avoiding it and/or disclosing it”. This mantra still remains with me and I attempt to interpret conflicts in the widest possible manner.

Having set the context, I would like to share some tips on living the ID role:  

Part of a team

Being an ID is a collective responsibility in carrying out the common purpose of oversight and governance. IDs are not a homogeneous group, they have to complement each other but avoid ‘group think’, must not feel constrained to speak their minds, able to disagree without being disagreeable and speak for each other if required. I have tried to be more willing to contribute and be a part of the final decision. This does not mean that I have not articulated my own views, but I have done it in order to build consensus.  For me, board governance is a team sport with each ID having different pieces of the same jigsaw which they then put together to make the whole picture.

In each of my boards, I have been seated at the board table alongside people a lot more accomplished, better known and with higher public profiles. I have respected each one for those attributes but have never felt unequal or accepted that there is a first among equals. I would suggest that those who feel otherwise can never really be truly independent. 

Participate

Being an ID is much more than attending Board meetings. I have made, and given time to my board assignments beyond meetings.  I believe, to fulfil board commitments one has to be prepared to give as much time “as it takes”. 

At the outset of each board appointment, I have established and/or assumed a right of unfettered access to any part of the organisation , with my own discretion being the only constraint on how I use that right in performing my role of independent oversight.  I have used that right to kick the tyres, feel the pulse, go to the source etc, particularly in the areas of finance and controls. In doing so I tried my best not to cross that murky dividing line between Board oversight and management prerogatives. An ID must know and decide how many layers of the onion to peel and also when to stop.

I try to actively participate in all discussions at meetings. I generally have a point of view and feel free to express it. For me it’s not about being right but whether my comments trigger some more hesitant ID to speak up or open up a new line of thinking. My belief that IDs are a team has always led me to latch on to “thought” hooks thrown out by others. As the final decision makers of major corporate decisions, I consider that an essential part of my job as an ID is to make my colleagues “think”. 

Accountability

I fully accept that boards, collectively and individually, have a fiduciary responsibility to all shareholders and in the era of ESG, a general responsibility to a wider group of stakeholders. I have found it helpful to formulate a litmus test for my own decisions as an ID.

Other than those considered “Promoters”, shareholders in my view fall into two categories- Institutional/Professional and Retail/Personal. Regardless of the size of their shareholding, I view the former as large, because they are sophisticated investors, and the latter as small. I also believe that the former has either direct privileged access to the company through the size of their holdings or as part of a class of investors whose views are understood by management. The latter “small” shareholders generally rely on public disclosures as their source of information and basis for action.

I decided early on that I needed a surrogate shareholder on whose behalf I would carry out my oversight and governance functions.  I, therefore, chose to represent the smallest of the small shareholder. I felt that if I could explain my decisions on each matter to that shareholder then I would be fulfilling my fiduciary duties to all shareholders.  My participation in decisions may not help that shareholder as much as others whose holdings are greater but in no instance would they knowingly harm him or her. 

Being an ID, is a continuous learning experience where one size doesn’t fit all and being absolutely certain is one step away from a lawsuit. Coming from the US, I have always visualised this image of being in a witness chair in a courtroom having to explain why I made a particular decision. I have felt that if in that setting I can openly express the rationale for my decision then that’s the standard I should follow. Some attorney interrogating me could question my judgement but not my motives. That is INDEPENDENCE.

(The views expressed by the authors are their own.)

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