A Step In The Right Direction By SEBI

It has been reported by ET that SEBI might consider imposing caps on the number of Independent Directorships a person can hold.(“SEBI Mulls Five-Board Cap For Independent Directors”, Reena Zachariah, 10/01/13). While in general, the cap is applicable to any director, the recommendations are going to be even more stringent in the case of CEOs of listed companies. CEOs can think of becoming Independent Director(ID) only in two other companies. There is only a handful of IDs in India who sit across  as many boards as the law permits.  While the exact number of directorships by a person  can take on is debatable even when he is not a CEO elsewhere, the multiple directorships  can set a severe limit on the time that an individual can devote to a company. Mr.Deepak Parekh was reported to be critical of the proposal on the ground that there is a paucity of good directors and many companies have not been able to fulfill the criteria laid down by SEBI and also because Ids are required to sit on the boards of subsidiary companies.

It is not surprising that Mr.Deepak Parekh, Chairman of HDFC is critical of the proposal. Deepak S.Parekh, while he was Executive Chairman of HDFC, was independent director on  12 publicly listed companies and also was on the board of a number of private and/or unlisted companies. His remuneration from these companies used to be more than Rs.1.00 Cr. ‘Professional director’    R.A.Shah( 88 years old), is still chairman at 4 companies, Vice-chairman of a company , director on seven companies and alternate director on another six companies, in addition to being Senior Partner at the solicitor firm, Crawford Bayley. The annual report of Biocon for 2011-12 where Mr.S.N.Talwar is an ID, lists 44 companies where he is either Chairman, Director or Alternate Director. Earlier the law  permitted  upto 15 directorships in public limited companies with no restrictions on directorships in private limited companies but the new Company Law 2013 has reduced number of directorships in public limited companies to 10 and across all companies to 20.

But such multiple directorships actually put lots of pressure on director time, and can lead to lack of attendance or at least dilution of their expected duties, leading to a denigration of the very institution of IDs.Estimates by Carter and Lorsch  (2004) put the time to be devoted  by any Non-Executive Director  (NED)for a company from about 80 hours(for a stable and satisfactory company situation and industry complexity  and where the board plays a watchdog role) to 320 hours (for a challenging company  situation and industry complexity where the board  plays the pilot role).Hence, any NED/ID will have to devote about 10 to 40 days to each company depending on the nature and complexity of the companies.

According to James O’Toole, Professor at University of Southern California, while commenting about Robert Townsend  wrote that Townsend(2007) “castigated dilettantish professional directors who sit on twelve boards and contribute to none.” Townsend himself had written  in 1971 on outside directorships and trusteeships for the Chief Executive, said:”Give up all those non-jobs. You can’t even run your company, dummy.”(Townsend 2007)

Mr.Parekh’s concerns that there is a paucity of good directors and many companies have not been able to fulfill the criteria laid down by SEBI must be put at the doorsteps of the companies and their boards . The Clause 49 regulations have been in place for more than  8 full years now. What have  India Inc and their boards done to train and make the availability of director candidates better during this period? In fact, a large number of aspiring director candidates have been trained by various bodies like IOD but to the best of my knowledge, very few of them have been successful in getting nominated for ID openings. The companies must try out new candidates by casting the net wide rather than restricting themselves to look at a given/very limited set of IDs who are already overloaded.