Will 2024 see end of grandfathering of board tenures? IiAS answers

Proxy advisory firm Institutional Investor Advisory Services (IiAS), in its recent report released today, said that the calendar year 2024 will see the end of the grandfathering of previous board tenures of independent directors.

"While corporate India has geared up to this reality and several companies have refreshed their boards steadily, progress on this account has slowed in the last year. By now, most boards should have been refreshed. Yet on December 31, 2023, 39 of the BSE100 companies had tenured independent directors on the board. One risk of the board refresh will be for business groups – if business houses decide to shuffle independent directors across group companies, it will defeat the purpose of the regulations. Therefore, it will be interesting to see if Indian companies truly embrace the need to refresh boards or try harder to maintain status quo," it stated.

"The progress on refreshing boards has slowed down. On December 31, 2023, of the 1,065 directorships of the BSE100, 582 (54.6 per cent) are independent director positions – of these, just 74 positions (6.9 per cent) are held by tenured independent directors. The needle doesn't seem to have moved much. Board independence last year, on March 31, 2022 was similar: then, tenured independent directors held 77 of the 1,064 board directorships, accounting for 7.2 per cent of the board positions," IiAS added. 

The advisory firm mentioned that 2023 was the year of family feuds, and promoters' misbehavior. "While the issues are litigious, independent directors have remained passive. Either taking a side or waiting for the patriarch to take a decision belies the fiduciary responsibility of independent directors. The fact that several boards are tenured, or filled with 'friendlies', limits the ability of independent directors to protect the company and minority shareholders from such family feuds," IiAS underscored.

It also suggested that 2023 was also the year in which two large business houses, among others, brought in the next generation onto their boards. "Both these conglomerates face a key-man risk but getting the next generation on the board is unlikely to solve for this. While having the next generation enter the business is not necessarily succession planning from a management point of view, it signals that the family houses are beginning to set their legacy in order," IiAS further said.

The IiAS report also showed that the components of the S&P BSE 100 (BSE100) index comprise almost 59 per cent of BSE's market capitalisation (m-cap). "This is unusually low – in the past the BSE 100 index constituents accounted for over 70 per cent of the total m-cap. The market exuberance in the smaller stocks is a possible explanation for this decline – but nevertheless, the top 100 companies have the most dominant institutional investment," it stated.

As of February 13, IiAS said the 30 constituents of the S&P BSE Sensex accounted for around 38 per cent of total m-cap.