Twist in the bored’room tale!

IIPM International Student Exchange Programme

Reducing the count of Independent Directors in public companies will only encourage foulplay...

‘Independence’ – a much touted term that India Inc. seems to be displaying little affection for, despite the fact that we’ve proudly celebrated a glorious 60th year of our Independence. And just you might be trying to figure out reasons why we made that particular statement, allow us to throw light on the grave issue of ‘Independence’ confronting India Inc. at the moment.... With rise in count of ‘independent directors’ & stricter norms of ‘corporate governance’ resonating across all boards of India Inc. as the most compelling want from stakeholders, the Securities and Exchange Board of India (SEBI) is toiling hard to prove the contrary! The new Companies Act, under clause 49, might empower SEBI to lower the mandatory count of independent directors on a company’s board of directors to just 33%, from the current levels of 50%! Where on one hand, a higher standard of corporate governance is an issue most imperative, India Inc. is witnessing a new roadblock and in a fashion which is anything but conducive for overall growth.

Also, considering the fact that even those who provide funds to an entity (like creditors, shareholders, securities investors et al) draw comfort from transparent & effective governance processes in the recipient entity, the relaxed corporate governance norms would adversely affect India Inc’.s capital raising capacity – something which wouldn’t receive smiles from the acquisition-hungry India Inc.!

True, questions have been raised concerning the effectiveness of independent directors on corporate boards – with the Enrons and the WorldComs breaking myths surrounding the same – it cannot be denied that independent directors on boards can be a most effective mechanism to ensure no marginalisation of the interests of other company stakeholders just as Jayant Pai, Market Analyst, explained to B&E, “Independent directors are supposed to bring about a sense of objectivity in decision making as they will not be obliged to favour the existing management. Hence, the rights of minority shareholders may be better protected...” Then there also stands the question that while on one hand, world’s leading economies – in the EU, Asia & the Americas – have rightly increased the minimum proportion to 50%, then why should India act otherwise?! As a matter of fact, post-2003, NYSE & LSE raised the minimum limit for proportion of independent directors on a public enterprise’s board from 33% to a better 50%! So to ask again – why should India lower the limit?!

Clearly, as India moves ahead as a global superpower, corporate governance is one aspect where it scores a tad lower as was proven by the corporate governance rankings given by the Political and Economic Risk Consultancy, which stated that while “in Asia, Singapore oft en holds high positions, China and India rank closer to the bottom”! Surely, lower count of independent directors on the board of public companies will lead to a diminished rationality in the entire management decision-making process as even a recent report by the European Commission proclaimed that lower count of independent directors increase the costs for the company and risk of abuse.... So while SEBI looks forward to decreasing the limit for India Inc. and while Damodaran, its chairman remains apprehensive about the effectiveness of independent directors, the fact still remains – well governed is indeed well run!!!

For Complete IIPM Article, Click on IIPM Article

Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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