Have Independent directors finally found their voice?

There may be early signs that independent directors are finally asserting their free will

The introduction of SEBI's Clause 49 in 2004 - brought in to strengthen internal governance systems via improvements in board structures, independent director responsibilities, audit committee functions and financial disclosure norms - and the resultant tightening of regulations post the Satyam fraud in 2009 are among actions seen as watershed moments in corporate governance reforms in India. The new Companies Act of 2013 as well as recent governance norms made public by the regulator last month have further reinforced the importance of good board practices.  

Above all, they have tightened the screws more than ever on independent directors - notorious in India for being compromised - with prescriptive guidelines on tenure and number of directorships. Measures have been brought in also to periodically evaluate independent director performance, and provide them a more central role to monitor abusive related party transactions.

Even as companies get fully prepared to put into practice the new rules, the pointed regulatory gaze and some rather potent shareholder activism has started showing early results, and mounting pressure on board directors to act bona fide in the interest of all. The tug of war between Maruti's institutional investors and its management, festering for the last month or more is a case in point.  It has taken 2 letters and a total of 16 mutual fund investors to nudge Maruti to scrap its related party deal with parent Suzuki. And while the company remains unwavering, its 4 independent directors, who had earlier given an in-principle approval to the deal, have now expressed several reservations regarding the transaction according to CNBC TV 18.

The channel's sources indicate that Maruti's independent directors have suggested that the car-maker seek minority shareholders' approval before going ahead with its Gujarat proposal. This despite section (188) of the Company's Act 2013, which requires such related party transactions to be approved by majority of minority shareholders, not being notified. They've also sought more clarity on taxation,  royalty and price formulas, no return on equity for the Suzuki Gujarat plant, no mark-up on cars sold from there and a provision for Maruti to get depreciated assets of the plant after 15 years to make the proposal beneficial to all shareholders.

If you go back in history, aside of Maruti, Coal India is perhaps the only big company in the country say experts,where an independent director - Samir Barua, openly challenged key decisions made by the management of the PSU miner like its bid to sign FSAs (fuel supply agreements) with private power companies. In the recent past another Ruia-owned company - Essar Energy's independent directors too had stepped forward to reject the Ruias' bid to take the company private. But Essar Energy is not an Indian company, and so the example is not appropriate.

Nevertheless, are there are early signs then, that directors are asserting their independence?

"I doubt. Independent directors haven't yet fully imbibed the fact that they are supposed to act in a fair manner, that their role exceeds collecting sitting fees" says Shriram Subramanian of the proxy advisory firm InGovern. "Even if what you are saying about Maruti is true, it clearly looks like a forced knee jerk reaction to me, in response to the mounting opposition by investors."

The environment will gradually change for the better though, believes Subramanian, as sections of the new Company's Act get notified and come into force eventually. The provision on class action suits in particular will be a game changer as the threat of being exposed will push directors to note their dissent in the minutes and record their disagreement with erroneous board proposals. 

In the interim SEBI's new code will continue to act as a deterrent believe experts. "Even if there is a further delay now in the issuance of the notifications under the Companies Act 2013 to bring in force the various sections of the Act, for listed companies it would hardly matter, because the new Clause 49 in any case effectively incorporates the essence of the relevant sections of the Act" says  Pratip Kar, a former executive director with SEBI, writing in this paper last month.

The battle at Maruti perhaps shows the early signs of directors starting to align to these new realities.