What Primary Role for Independent Directors ?

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Of late, a number of articles have appeared in the business press about independent directors(IDs). With modern corporate governance laws and regulations insisting on independent directors as the corner stone of better governance, a lot of discussions and debates have also been happening on the role of IDs. Everybody agrees that IDs are required for better corporate governance.But different people define  the roles differentlly – some as  strategic advisors to the management & watchdog to protect the interest of the minority shareholders,some say it is to oversee the financial and management performance, some others say it is to hire and fire  CEOs and plan for succession in the management hierarchy. While these are all elements of good corporate governance  and also part of the roles  which IDs play, they play these roles as any other members of the board, not specifically a IDs. In fact, the board has a collective responsibility for all these including the IDs. Then what is the primary role of IDs in a corporate entity? The word corporate entity is very important in this context because that is why we need corporate governance. Corporate bodies  are created as entities distinct and separate from promoters or management. Promoters, by and large, have a tendency to treat the companies as their private properties, and will find it difficult to appreciate it as a separate entity  which has an existence of its own, delineated from them. Whether it is Azim Premji  with more that 80 percent of Wipro or Mr.Sudhir Reddy   with  only 11.18% in IVRCL (Source: Annual reports of Wipro and IVRCL for 2011-12) one has  to keep this in mind. The very concept of inducting Independent Directors on to the boards of corporate entities must have been borne out of the premise(or fact) that the promoter will find it extremely difficult to  draw a line delineating his interest and the company’s interests. The recent controversy at Jindal Steel & Power, relating to the move to authorize the promoter Chairman & Managing Director “to revise, from time to time, remuneration of Whole-time Directors of the Company, by whatever designation they are called, by way of annual increments or otherwise” (Annual Report,2011-12,JSPL) is the result of such treatment of the company as an extension of the family. Had the promoters treated the company as a separate entity, different from family, such a proposal would not have arisen at all. Some of the world’s best known companies like General Electric(GE) continues to be governed well even though the promoter lineage doesn’t exist now, precisely because of this concept.

Dolphy D 'Souza in his recent article (Independent Directors: More questions than answers, BL, Mays}, 2013) says that "It is a strange irony that IDs appointed by promoters have to protect the interest of the perceived adversaries of the promoters-the minority shareholders." While in India, D' Souza's  views on the appointment part could be true, as a nomination committee, constituted  only of IDs is not mandatory according to our corporate governance regulations. But why the statement that minority shareholders are adversaries of promoters and hence IDs have to protect their interests. Why should minority shareholders' interests be different if the corporate body is well managed & governed, in the larger interests of the organization’s well being? Shareholders, whether promoters or others may have interests which are different from the firm(the entity). Minority shareholders  are usually a fleeting type who may not be interested in anything other than their returns. But they don't object to any decisions made by the majority shareholders (mostly promoters) who are usually in management in India, if they feel confident that the decisions are good for them too. But the shareholder emphasis in corporate governance is is not necessarily right or even legitimate  because the shareholders are not permanent(including the promoters, who at times decide to exit or allow the firm to be acquired by others  or merged with others primarily because it is good for them or the management and not necessarily for the entity).  This only adds to  my argument.

D' Souz also opines that “IDs argue that  they do not have voting power and should not be seen as a panacea for wrongdoings." This contention is wrong as IDs mostly matter in a board meeting where if the majority of IDs oppose a decision by the promoter directors or inside directors or management(executive as well non-executive directors who are promoter nominees) and it is quite possible that the promoters have to give adequate weightage for the opinions of the IDs,and not in an AGM where shareholding matters. Also, one may not fully agree that IDs can only resign from the boards “when his or her  efforts to correct the wrongdoings are unsuccessful ." The problems Iie in the fact that the IDs owe their positions to the promoters and with the kind of remuneration they get today, very rarely they object to the wrongdoings by the promoters.Resignation is not the answer. They should have first objected in the board room, insisted that their views be recorded in the minutes of the board meeting. If still promoters don't budge, they should be willing to express their opinion in public. Resignation will only weaken the institution IDs. Or if at all one resigns, why doesn't he explain the reason for resignation to the public at large? This is to be done in the interest of efforts towards better governance.Unless the IDs exert the power vested with them, governance will not improve. At least there has been one example where IDs  as a group put their  foot down and objected to the plans of management and a formidable majority shareholder like Government(Coal India Ltd.) because the decision by the management (with tacit blessing  by the government). Of course, at the other extreme, the IDs at Jindal Steel & Power  seem to have done nothing against a move by the promoter shareholders to authorize the CEO to fix the rumination to be paid to whole-time directors including himself, letting down the very institution of IDs. (The IDs didn't even have to protect their  'high' remunerations ' in this case: they are paid a pittance).

Off course, I do agree with D' Sousa that IDs have to rely heavily  on management for information and it will be cruel to punish them just like promoters-directors or whole-time directors on the premise of collective liability of the board. We should rather wait for many more years and let the governance processes establish with objectivity in  the  board rooms. Laws and regulations must be suitably amended or created to protect the IDs if they acted diligently in the interest of the corporate body.