Keep’em separated
| Hindustan Times, New Delhi | Tuesday April 13-2004 |
PLATFORM| Madhav Mehra
Keep’em separated
Independent directors ar the corner stone of good corporate governance. Selecting them wisely is our only to hope to instill some discipline in the murky world of Corporate finance
WE ARE yet again breeding a culture of greed. One third of a listed company’s directors are required to be independent. The erswhile Company’s (Amendment) Bill 2003 had stated that a majority of the minimum sever directors of public companies having share capital in excess of Rs. 5 crore should be independent. Clause 49 of the listing agreeements defines independent directors as follows : “For the purpose of this clause, the expression ‘independent directors’ means director who apart from receiving directors remuneration, do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in judgment of the board may affect independence of judgment of the board may affect independence of judgement of the directors.”
The key difference between a non executive director and a non executive independent director is that the latter is forbidden have any pecuniary relationship with the company apart frm receiving a sitting fee- which at the time of writing that clause was Rs. 5000 and has since been raised to Rs. 20,000. Can we truly justify a fee of $ 450 for a few hours’ work in a country where the average wage is less than $3 a day? Do we have consent from shareholders for raising it four times? Perhaps not, because turkeys do not vote for Christmas.
Independent directors are raking in Rs. 8-12 lakh a year per company in commission alon. Add to this the sitting fees and the total can be 12-16 lakh . At present you can be a director on the board of 15 listed companies. So you could be richer by almost Rs. 2 crore a year. What is then the difference between a non-executive and independent director?
Independent directors are the cornerstones of good corporate governace. There is the duty to provide an unbiased, independent, varied and experienced pespective to the board. Corporate scandals of Enron and Worldcom have revealed how this independence has was compromised by expectation of excessive rewards. Should we not draw lessons? When a director has developed a stake in a company to the tune of Rs. 10-15 lakh a year, would he be able to risk it all by going against the current? This is a hard bat to knock.
We mustn’t forget that we’re talking of corporate India where a vast majority of listed companies have destroyed shareholder’s value. A survey by the Society for Capital Market Research and development indicated that of the 6,330 BSE listed companies, only 16 percent are dividend paying; 83 percent of the listed companies in B2 Group, T Group and Z Group have destroyed shareholders value.
A solution to eliminate the cosy relationship between independent director and their companies can be found by creating an imdependent body under SEBI. It will be charged with the role of screening and recruiting independent directors and placing them with listed companies. All fees and allowances are paid by the independent organization under SEBI. The organization should be funded through a special levy charged by SEBI from each listed company based on the turnover of the company.
In the selection of independent directors, we mustn’t look simply for high profile names. The issue is to have someone with an independent state of mind. In an economy fired by innovation, our biggest threat is obsolecence. Periodic training of directors is a must. Unfortunately, there are few courses designed primarily for directors. Warren Buffet recently lamented about the failure of independent directors to protect the interest of shareholders. He blamed the cosy ‘boardroom culture’ with ‘well mannered people’ finding it almost impossible to suggest replacing the chief executive. He said that questioning their remuneration would be like “belching at the dinner table”. Independent directors are our only hope to instill some discipline in the murky world of corporate finance. W have to make sure that greed plays no part in their appointment – even if it means belching at the dinner table.
The writer is President, World Council for Corporate Governance
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