Independent directors have been given short end of the stick

Low remuneration for independent directors cannot attract good talent. Their job, howsoever noble some project it to be, needs to be compensated well

A recent news item of what was reported to be a courageous stand by an independent director in performing his duties diligently made him a model in some eyes, and a martyr to others. The independent director wrote a 65-page letter of resignation (25 pages highlighting his reasons and 40 pages of annexures of information) against alleged misdeeds in the governance of the listed company in question.

It was seen as a model stand because many retreat quietly or give vague grounds such as ‘personal reasons’ or ‘other preoccupation’ (SEBI Regulations though now require specific reasons). Here, the independent director narrated in specifics his allegations of wrong doings in the company, and of how he was cornered and bullied.

He was seen as a martyr because such is the fate of independent directors to whom the law keeps largely powerless as individuals. They can only vote with their feet, as their saying goes — or, quit and not cure. It is another thing that the company in question has reverted with a 28-page letter of rebuttal giving its side. Now it may be up to the regulator to go into the real state of affairs.

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However, the larger issue here is the role of an independent director, what they can do as an individual, more so since they are seen as one of the major pillars of corporate governance in listed companies. Does the law create a good foundation for this institution? Does it give them powers comparable to the expectations that are placed on them and the obligations and liabilities that they are subject to?

That independent directors form a cornerstone of good corporate governance is self-evident from the law. There are elaborate qualifications — and even more elaborate disqualifications — laid down for a person to be eligible to be so appointed. The board needs to constitute of a minimum percentage of independent directors — one-third or one-half, depending on certain conditions.

Essentially, the independence is particularly judged from connections, or their lack, with the company and its promoters. Even the appointment of independent directors, at least in theory, is meant to be initiated largely also by them. This is so since the Nomination and Remuneration Committee, like the Audit Committee, must have two-thirds of independent directors. It is another thing that the appointment also must be approved by shareholders where promoters can have the final say. The promoters also play a significant if not deciding role in determining their remuneration. These not so obvious factors do affect their effective independence.

The independent directors have individually and through the committees they dominate have a significant role. They have wide obligations and liabilities. The Companies Act, 2013, even has a lengthy code for independent directors.

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Surprisingly, then, the lawmakers have been stingy and grudging in remunerating them. There are upper limits of sitting fees they can be paid, which max out at Rs 100,000 per meeting. They may be paid commission, but that is related to profits. Thus, companies with losses or inadequate profits, who need independent directors as much if not more, would face problems in attracting individuals with merits. They cannot be granted ESOPs. They are expected to devote considerable time in reviewing board meeting papers, accounts, annual and quarterly results/reports, important decisions, and even general strategy determination.

Such low remuneration then can hardly attract good talent. The job of independent directors, howsoever noble some project it to be, needs to be compensated well. Their services are after all sought by for-profit companies and shareholders looking for good returns on their investments.

Equally strangely, there is hardly any power an individual independent director can wield. They have to act as part of the committee/board where they can ask questions and information. But individually, they can at best express their dissent, which may get buried in the minutes. In practice, most companies and their officials do attend to queries of individual directors, even between two meetings.

There is, fortunately, a specific limitation on liabilities of individual independent directors under securities/company laws. They would generally be responsible only for matters that are brought before them at board meetings. Here too, the test applied would be about the diligence they have exercised. While these provisions have not yet been extensively tested in courts and carry ambiguity in wording, they provide a good shield except where the negligence regarding serious wrongs is blatant.

But that once again brings back to their role and powers at an individual level. Sure, they can vote with their feet and quit, as the director in the abovementioned case was reported to have done. But while, in all fairness, companies cannot be held hostage to whims of individual directors, at the very least their views need a wider forum of expression. Subject to reasonable restrictions, their views, particularly reasoned dissents, could be shared with the investing public through annual/quarterly reports, at general meetings or even generally through exchanges.

To summarise, the current case is a good reminder of the ills plaguing this institution which shoulders a good burden of ensuring good corporate governance. The top ills are their poor remuneration the dependence on promoters for their appointment and remuneration and the lack of reasonable individual expression. If these are not dealt with, then the quality of corporate governance may follow the saying — you reap what you sow.

(Jayant Thakur is a chartered accountant.)

Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.