After the conflict of interest case involving ICICI Bank CEO Chanda Kochhar came to light, the bank, on March 28, issued a statement defending its credit approval processes and the role of its CEO. "The credit approval authorisation framework is laid down by the Board of Directors. The larger exposures are approved by the Credit Committee of the Board. The majority of Credit Committee members are independent directors of the bank. The Chairman of the Credit Committee, till as late as June 2015, was always a non-Executive Director," it said.The bank focused on independence of its non-executive directors to convince shareholders, media and others interested in the developments that "there are adequate checks and balances in loan appraisal, rating and approval processes within the bank, both from control as well as from governance perspective." The issue at hand was a Rs3,250 crore loan to Videocon Group, which had business relations with Chanda Kochhar's husband Deepak Kochhar.
The statement went on to say that the board did not find any evidence of nepotism or conflict of interest in extending the loan. However, under pressure from various quarters, including CBI and Sebi probes, the bank board finally asked Kochhar to go on indefinite leave till the probe ordered by it is completed. At this stage, questions began to be asked about the role of the bank's board, especially the independent directors. Many experts say the ICICI Bank fiasco again proved that independent directors, supposed to be custodians of corporate governance, are happier toeing the management line than raise questions on issues concerning governance and minority shareholders.
ICICI Bank is not the only big case where independent directors were found wanting. In May, two Fortis Healthcare investors - Jupiter India Fund, East Bridge Capital Master Fund Ltd - sought removal of four directors, including three independent directors, through an extraordinary general meeting. The investors said the directors had not satisfactorily exercised their fiduciary duties towards all shareholders and failed to maintain the expected levels of corporate governance. The decision to remove the directors came after an allegation that promoters Malvinder Singh and Shivinder Singh siphoned off Rs500 crore from the company without the board's approval. What happened in Tata Sons last year when independent director Nusli Wadia - who had opposed the then chairman Cyrus Mistry's ouster - was asked to resign from Tata group companies' boards, does not give one too much confidence about the institution of independent directors. "The reasons for which I am being sought to be removed as director is my independence of mind and action.. My independent stand has aggravated Tata Sons and my removal is being sought because I chose not to follow their diktat. My fiduciary duty is to your company and not to an unidentified Tata group," Wadia, himself the chairman of the Wadia Group, had said then. What transpired in Infosys, where founders and investors openly criticised some of the steps taken by the then CEO, Vishal Sikka, forcing him to resign, also came as a shock to many. Here, too, independent directors were caught between the management and the founders, who were gunning for the CEO.
The question is - how independent are independent directors? Are they too overawed by promoters, especially if they are industrialists of repute such as Ratan Tata of the Tata group or N.R. Narayana Murthy of Infosys, that they let them have their say even if that means compromising the interests of minority shareholders? Can they ever be completely 'independent'?
Independent directors are not government or regulator-appointed 'representatives' who wield unlimited power independent of the company or its promoters. They are, in fact, appointed by the company itself. Though the law says that the selection of independent directors should be independent of the management, they are selected by the company board, which also comprises chairman, CEO and other executive directors.
"Full independence is too much to ask for; after all, he has been picked up by promoters and the management. They interact with you before they select you," says Amarjit Chopra, Senior Partner, GSA Associates, and independent director on boards of Rico Automobiles and Tata Power Delhi Distribution Ltd. Though the appointment has to be approved by shareholders, there are few instances of shareholders rejecting such appointments. Shriram Subramanian, Managing Director of InGovern, an independent corporate governance research and advisory firm, says shareholders need to vote for truly independent directors.
Even the search for candidates is done through reference and word of mouth. Most appointees are known to promoters or existing directors or are friends and acquaintances of promoters or directors. It's a close-knit circle where most people know each other directly or indirectly. "We generally check independence by relations - business or blood relations. But you could be just my friend," says Pavan K. Vijay, former president of Institute of Company Secretaries of India (ICSI) and founder of Corporate Professionals, a corporate law advisory firm.
While he believes that the process for selection of independent directors is flawed, he thinks the government's idea of creating a database of independent directors is also not a foolproof solution. "They are talking about creating a database of independent directors. There is confusion as many agencies are working on it. We do not know if you can make it mandatory for companies to select independent directors from that database only. Unless that happens, it cannot give you any solution," he says.
A provision in the Companies Act, 2013, requires the government to maintain such a database. However, not many believe that this can resolve the issue of independence. "It hasn't worked effectively in any country. There would be some familiarity between the independent director and promoters. Invariably it happens through a networking circle," says Shriram Subramanian of InGovern.
Compensation: Too High?
The high compensation some independent directors get can further undermine their independence. "Compensation can be a double-edged sword. If you are paying peanuts, how can I serve you well? And if you are giving me good compensation, my independence could be in question," says Pavan K. Vijay of Corporate Professionals.
Independent directors, based on their expertise and network, are paid in two ways - sitting fee and commission. The sitting fee can be up to Rs1 lakh for attending a board/committee meeting. While the sitting fee is nominal, it is the commission that some companies pay their independent directors that can influence their functioning. The commission paid to all independent directors can be up to 1 per cent of net profit in cases where the company has a managing director or whole-time director or manager. In case there is no managing director or whole-time director or manager, a maximum of 3 per cent of net profit can be paid to independent directors. Because of these commissions, some independent directors make crores in a year. Reliance Industries, for instance, paid Rs1.5 crore as commission to most of its independent directors in 2017/18, while TCS paid more than Rs1.5 crore commission to all but two independent directors, with the highest being Rs3 crore. Tata Steel paid over Rs1 crore to two independent directors.
"Some former bank managing directors and bureaucrats may not have made the kind of money in the prime of their career that they are making today by being on company boards. Some of these people could compromise on their independence to continue receiving such remuneration," says J.N. Gupta, Co-Founder and Managing Director, SES Governance, a proxy advisory firm.
Preeti Malhotra, a member of the Board of Governors of Indian Institute of Corporate Affairs and a member of the committee to review the offences under the Companies Act, 2013, says one way to ensure the independence of independent directors is to fix a limit on their remuneration as a percentage of their gross annual income.
No 'Real' Independence
Independent directors often complain that many times the agenda comes so late that they do not have time to study it properly. "Board papers are so hefty. Sometimes, to read and decipher them in five-seven days could be a big task," says Mamta Binani, who was former president of ICSI and is independent director on boards of Century Plyboard, Kkalpana Industries, Anmol Industries and Emami Cement. Also, there is no standardisation in drafting of agenda paper and other documents. Then there are certain agenda items that are discussed in the meeting unannounced.
In the corporate world, it is not rare to find managements hiding facts from independent directors, says Amarjit Chopra. However, some independent directors have the knack of unearthing facts, he says. "Earlier, if the agenda was unpleasant, independent directors used to skip the meeting. But now, with more accountability, even if you were not in the meeting but have read the agenda, you are supposed to point out anomalies or flouting of rules, if any," he says.
Geeta Mathur, who is on boards of a number of companies, including NIIT and Sona Koyo Steering Systems, says though the source of information is primarily the management, she herself does a lot of independent study. "I know a lot of bankers and other people in the corporate world. I get a lot of research papers. So, I do my homework. But eventually, the information we depend on is the one we get from the management," she says.
However, despite the due diligence, she says, there are some details like those of related-party transactions which can never be 100 per cent correct. "If the management does not report a certain transaction, there is no way I can find out if it is a related-party transaction," she says.
Irrespective of their limitations, the accountability of independent directors has increased substantially after the implementation of the Companies Act, 2013. The Act says an independent director can be held liable if the company flouts any law with his/her knowledge 'attributable through board processes, with his/her consent or connivance; or where he/she had not acted diligently.
Independent directors, therefore, cannot afford to be just a rubber stamp. They will now be held accountable for any act of omission or commission by the company. For example, in the PNB-Nirav Modi fraud case, the National Company Law Appellate Tribunal recently allowed the government to attach assets of five independent directors of Nirav Modi's company Firestar International. "The role of independent directors has become onerous. They can't just be a rubber stamp because their accountability has increased," says Shriram Subramanian of InGovern.
Arpinder Singh, Partner and Head - India and Emerging Markets, EY Forensic and Integrity Services, says proving 'knowledge' is not very difficult because if you are sitting in a meeting, some information would be put in front of you or there could be some email sent to you. So, independent directors should be cautious and ask for more information. When they are not comfortable, they can ask for third-party audits to get additional comfort on what the management is providing them. "Independent directors are now under scanner as much as executive directors. But howsoever good you are, an independent director would not have the kind of access to information that an executive director would have," says Mamta Binani.
Ved Jain, a chartered accountant and an independent director in DLF Ltd, says, "Warning signals come very early and the independent director has to be on his toes to find out where the problem is arising. How much one can dig out depends on ones personal and professional skills."
The strict provisions of the law are showing results. Arpinder Singh of EY sees a clear change in the attitude of independent directors. "In the last two-and-a-half years, I have seen a change in the way independent directors engage with companies. I think there's lot more questioning and a lot more enquiries than in the past. I think the roles have become clearer. Also, the Companies Act, 2013, is more prescriptive," he says.
The number of 'conflicts' have also gone up. The number of independent directors who have resigned has risen to 856 in the past one year from 550 a year ago.
The regulators are trying to fill the gaps by tightening some rules governing independent directors. In one such move, the government has now made it a rule that an independent director who has been appointed for the second term can only be removed through a special resolution, which means approval of 75 per cent of shareholders is needed as against the earlier requirement of 50 per cent. Also, Sebi recently said that listed companies could appoint or re-appoint a person above 75 years as an independent director only through a special resolution. This move is aimed at making the boards younger. The current average age of independent directors on boards of companies listed on the National Stock Exchange is 63 years. Apart from this, Sebi, in March this year, accepted many recommendations of a 21-member committee led by Uday Kotak on corporate governance in listed companies. Many of these recommendations related to independent directors. One recommendation that was immediately implemented related to cross directorship - a non-independent director of a company (A) cannot be an independent director in another company (B) if the executive director of B is an independent director in A.
The role of board committees, which also include independent directors, has been enhanced. The committees are now required to check the end use of funds raised by a company from primary issues. The remuneration committee can also recommend payments to employees one level below the board members.
The maximum number of directorships a person can hold, including independent, in listed companies will be reduced to seven from the current 10 in a staggered manner from next year. This is to ensure that the directors give sufficient time to each board.
Independence Vs Effectiveness
Most independent directors say the word independence is taken at face value without anyone understanding its meaning. They say that while the primary objective of an independent director is to maintain high standards of corporate governance, growth and profitability of the company are also one of their primary concerns. Geeta Mathur says how effective you are as an independent director is more important than how independent you are. She believes independence does not necessarily mean dissent or disruption. "Ultimately, we are all working for the company's benefit. Our point of view should not come in the way of the companys growth," she says.
Mamta Binani says not being at loggerheads doesn't mean we are not asking tough questions. "If the board is sensitive about compliance, we get the right answers. And if we don't get the right answers, we push hard that at least remedial measures are immediately taken."
Most agree an independent director doesn't need to wield power and all he needs is to use his skills and experience in helping out the management. "Bonhomie is also important. The moment there is a rift, things can only get worse, which will not help the company's growth in the long term," says Ved Jain.
The institution of independent directors is evolving. Recent corporate feuds and frauds would only lead to its strengthening.