In India Inc, this is what independent directors really need

Published: September 19, 2017 4:06:01 AM

However, they are not supposed to interfere in day-to-day management functions.

The board works as a spine in the structure of a company, of which one segment is independent directors, forming the vertebra, having the strength to fight risk.

The board works as a spine in the structure of a company, of which one segment is independent directors, forming the vertebra, having the strength to fight risk. At the same time, it is argued that “independent directors are not independent.” This is not really correct. Independence is there, but not sufficient to discharge their responsibilities. Since their prime duty is to manage risks, they have to face tough challenges. The duty of independent directors is to formulate policies and oversee the welfare of stakeholders, and their focus is risk management. They have to see through agendas prepared by the management, to see whether the implementation of policies is being followed. But they are not supposed to oversee day-to-day activities of a company.

It is necessary that their appointment is made on merit. It is generally seen that board members, including non-executive independent directors, are nominated by the chairman and promoter directors, on the basis of relationship, mutual understanding and vested interest, not on technical qualification and proper exposure to risk of corporate sector. Appointment of independent directors should not be for three years, because by the time they become conversant with the functions of a company and the rules of the regulator, their term gets finished. If this term is extended to five years, a company will benefit. Moreover, Sebi should not only be the last to approve their appointment or termination, but the chairman or executive director of Sebi should meet with independent directors on a quarterly basis to find out the gaps in their performance. Such a step will enable them to work efficiently and without any fear. In addition, observations and suggestions of independent directors should be included in the minutes of board meetings, and they should be accountable for lapses in procedure compliances. They should also have veto power to reject such proposals of the board that are not in the interest of shareholders and the company itself. They should not feel obliged to promoters and shareholder directors.

Sebi has also proposed to focus on risk management by board members. In fact, risk management is the most necessary input in the financial stability of a company. It is generally seen that independent directors do not professionalise in risk management strategies. Board directors frequently tend to accept company generated projections without examining underlying assumptions. SEBI board has to make it mandatory for a company to impart good training to board members on risk minimisation techniques. The report of the NACD Blue Ribbon Commission on Risk Governance states that “the board’s role is quite simple to provide risk of oversight. This means making sure that management has instituted a process to identify and bring to the board’s attention, the major risks the enterprise faces. It also means continual revaluation of monitoring and processing of risk with the help of the board and its committees.” Following the appointment of non-executive independent directors and formations of various committees, independent directors have to assess how the compensation committee measures executive performance. Whether the mechanism to evaluate value creation by the executives has affected financial performance of the company, whether the remuneration committee has effectively negotiated compensation of executives, whether alignment of interest of management and that of other stakeholders is in harmony with the guidelines used by the governance committee…

There are some independent directors who regard their appointment as recognition for past achievement, confirmation of their social status, and not a great deal of work. It may be clearly understood that independent directors should be committed to their business of attending to the agenda of meetings with full understanding and realisation without fear from management. It is true that independent directors feel exposed and anecdotal facts suggest that inside executives have been found more hesitant and less cooperative with independent directors. The management should know the strength, weakness, opportunity and threats to a company. Generally, independent directors are unable to get the information on weakness and threat to a company from management side, so they have to be cautious of the vested interest of promoters or other stakeholders. In a nutshell, independent directors carry a heavy bag of responsibility in terms of framing policies and their 100% implementation by the management. However, they are not supposed to interfere in day-to-day management functions. Their responsibilities end at the level of board, and for all other activities, promoters and management are bound to be liable.

MY Khan
Former Economic Advisor, SEBI
Views are personal

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