Business Today

Ensuring independence

The failure of Satyam’s independent directors has exposed the ineffectiveness of the policy.

Puja Mehra        Print Edition: February 22, 2009

In 2000, the centre had amended the Companies Act to provide for two directors on company boards representing small shareholders. It was a great move, except that the clause was diluted from “shall” to “may” over protests by corporate lobby groups. Now a company can simply choose not to make the appointments.

The policy for independent directors—prescribed under the Act and by SEBI in Clause 49 of the Listing Agreement—is weak, feel most experts. Here are the three major policy lacunae:

Status sells
Clause 49 stops at laying down a few disqualifications, which do not include criminal backgrounds or illiteracy. There are no norms on qualifications or experience required for independent directors. Companies, therefore, often tap celebrities, especially just before hitting the market for funds through IPOs. Jet Airways, for instance, has Shah Rukh Khan, Yash Chopra and Javed Akhtar on its board. “It is important to have independent directors with strength of character, who are willing to blow the whistle and be assertive,” says Virendra Jain, founder, Midas Touch Investors Association. In reality, however, companies often induct retired bureaucrats as independent directors to take advantage of their lack of domain knowledge.

Insiders or independent?
“Independent directors more often than not tend to be insiders such as former employees,” says Prithvi Haldea, Founder-Managing Director, Prime Database. Though regulations disallow promoters to appoint their relatives as independent directors, a “relative” excludes cousins and other close relations from the wife and mother’s side.

No role or code of conduct
Most significantly, the policy for independent directors doesn’t stipulate the role or a code of conduct. Thus, even though minority shareholders at Satyam have plenty of reasons to blame its independent directors, it cannot be automatically said that they violated Clause 49. “The concept of independent directors is a myth, offering a false sense of security to small shareholders,” says Haldea. He says several independentdirectors have told him they think their role is to add value to a company or help it network better, while in reality, it is to protect small shareholders’ interests.

The case for strengthening the policy on independent directors is strong, but good corporate governance is essentially an inherent trait. Beating the intent of fraud calls for a stronger mechanism for identification and swift punishments.

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