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| Clause 49, RIP? | | About 500 independent directors have quit, partly due to potential reputational/other risk by being on boards where they may not be aware of things |
| Business Standard / New Delhi May 29, 2009, 00:50 IST |
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Even the best of independent directors, the Satyam episode showed, could not catch the huge fraud perpetuated by B Ramalinga Raju. But, as a study by Prithvi Haldea of Prime Database shows, the problem with independent directors is broader, and deeper. For one, according to Mr Haldea, less than a fourth of all independent directors are really independent in the sense that they have no connection with the promoters. Indeed, he points out that more than 3,000 people who were on the boards of various companies on January 1, 2006 were re-designated as independent directors to comply with the Sebi stipulation that a certain proportion of the board should consist of independent directors; in around 30 per cent of the companies, promoters simply re-designated themselves — calling themselves non-executive chairmen meant their companies could get by with a smaller proportion of independent directors (one-third, instead of half). The educational qualifications of these independent directors don’t instill great confidence either — though the Satyam case showed that higher educational qualifications don’t necessarily help.
Meanwhile, another problem has cropped up, in that non-executive directors are busy quitting company boards. According to one count, no fewer than 500 have already made their exit, influenced apparently by the realisation that they potentially incur reputational and other risk by being on the boards of companies where they may not be fully aware of what is going on—as happened in Satyam. The short point is that there aren’t enough independent directors available to ensure proper compliance with Clause 49, and what passes for compliance is procedural eyewash.
So is it time to scrap the whole notion of Clause 49 of the agreement through which companies list on the stock exchanges? Arguably not, because less drastic courses of action are possible. Among the many reform measures that could be considered for making independent directors more effective are: providing for separate funds for independent directors to hire their own experts, asking the audit committee to spend time separately with the independent directors, and holding special classes and courses on accounts and other disciplines. Others suggest the creation by the stock market regulator of an approved panel of independent directors which companies could draw on to man their boards; limits to the remuneration that can be paid to these directors; and a ceiling to how much of an independent director’s income can come from a single directorship.
This list can be expanded, and each suggestion can be positioned as one which will ensure that independent directors do their job. But can any set of independent directors, no matter how well-known they are, actually hope to rein in a promoter who is determined to go his own way? Companies routinely fail to follow disclosure norms, but there is little penalty for this. Having independent directors as a substitute for government oversight is something that never made sense. Both Satyam and Mr Haldea’s study have made it amply clear that it still does not make sense.
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