Perks for independent directors raise concern

Cos offer stock options, board seats in foreign arms; high remuneration has inverse relationship with independence, say critics

On Friday, shareholders of information technology services firm Tech Mahindra voted on resolutions reappointing independent directors (IDs) A P Puri, M Damodaran, R Kulkarni, T N Manoharan and M R Rao. Last year, these directors were granted 15,000 stock options each.

Ranbaxy Labs went abroad to reward its IDs. The company, in the process of being acquired by Sun Pharma, has proposed to nominate Rajesh V Shah, Anthony H Wild, Percy K Shroff and Akihiro Watanabe, its IDs, as directors on the board of major subsidiaries abroad, with profit-related payment up to Rs 1.5 crore a year to each. Ranbaxy also paid a significant amount of commission to its IDs, despite making losses in the past financial year.

HAPPY DIRECTORS, UNHAPPY ACTIVISTS

• Corporate governance norms tightened under Companies Act, Sebi
• Many independent directors may have to give up directorships under new norms
• Demand for independent directors to go up
• Companies trying to incentivise independent directors through new methods
• Governance firms worried that higher remuneration affects independence

Tech Mahindra and Ranbaxy did not respond to email questionnaires sent by Business Standard. Bajaj Auto and Piramal Enterprises have also faced criticism with their remuneration structures and alleged conflicts of interest for their IDs.

The increased focus on IDs comes on the heels of shareholder rejection of a proposal for a pay rise for senior executives of Tata Motors earlier this month. “At a broad level, there is an inverse relationship between remuneration and independence,” says Pranav Haldea of Indiaboards.com. “We have recently seen huge sums paid to former civil servants, who take up board positions.” He points out that when retired people who take up these positions are dependent on these as their primary income source, things get even trickier.

Recent regulatory changes have pushed up demand for IDs and put pressure on companies to retain them. The Securities and Exchange Board of India has stipulated that a person can serve as an ID on the boards of a maximum of seven listed companies and only three if a wholetime director in one. According to Indiaboards.com, this would mean 97 persons would have to resign from 283 ID positions in companies listed on the National Stock Exchange by October 1. Another measure that will increase demand is the classification of nominee directors as non-independent.

It is no secret that many directors would choose to sit on boards that take better care of them and resign from those less remunerative. To be sure, these payments are within the legal framework. But, questions are being raised whether high levels of remuneration affects a board’s independence. Also, IDs are expected to be sounding boards of the management and to act in an unbiased manner.

Proxy advisory firms have been trying to sensitise companies to the difference between what is legal and what is ethical, and what affects independence. In a report that recommended investors vote against Tech Mahindra’s proposal to grant options, Stakeholders’ Empowerment Services (SES) said, “Since the options were granted to IDs post the passage of the Companies Act, 2013, SES does not consider the directors who were allotted options to be independent, especially given the fact that all these were members of the remuneration committee which allotted the said options. While legally they may still be classified as independent, SES believes the directors have lost their independence on ethical grounds.”

Institutional Investor Advisory Services said in a report on executive pay following the Tata Motors incident, “Resolutions on fixing compensation are often ambiguous and do not provide shareholders with sufficient information to make an informed decision. More, the remuneration policies for Indian executives are structured in a manner that gives the board discretionary powers in fixing the final pay. To add to the uncertainty, the resolution is typically merged with the (re)appointment of the individual. So, while investors may want to (re)appoint the individual, they may also want greater clarity on the compensation. Because they are unable to split the resolution of appointment and remuneration, shareholders are often caught on the horns of a dilemma while voting.”