Can a Board within the Board be avoided?

In a director's training programme I was discussing the relationship between independent directors and executive directors. At the end of the discussion, one participant seemed agitated. He raised the point how the Board can be divided into two groups - the group of independent directors and the group of executive directors. He felt that the discourse on relationship had turned into something like a debate on independent directors vs. executive directors. It cannot be overemphasised that the Board should act collectively for the benefit of shareholders and other stakeholders. However, in practice, on the face of it, the Board arrives at consensus on critical decisions through debate and deliberations, but, in reality, there is always a palpable tension between executive directors and independent directors. After all, every individual who approaches a problem with a particular interest or priority cannot take a totally unbiased view on the same. This is the reason why the Companies Bill 2012 does not recognise a nominee director as an independent director. An independent director analyses an issue from the minority shareholders' point of view. Similarly executive directors analyse an issue from the dominant shareholders' point of view. Moreover, in any deliberation, personal biases creep in, although a professional is conscious of such biases and does not allow his/her decisions to be affected by such biases. It is utopian to assume that boardroom discussion will always be tension-free. It will be tension-free only if independent directors are subservient to executive directors.

Empowering independent directors through regulations might lead to creation of a power centre within the Board. In a workshop during discussion on whether the concept of lead independent director should be introduced in India, we saw a clear polarisation into two competing ideas - independent directors supported the idea while executive directors opposed the same. The main concern of executive directors was that creation of such a position might lead to creation of a power centre in the Board. The concern cannot be ignored.

The government has decided to strengthen the institution of independent directors by introducing new provisions in the Companies Bill 2012. The Bill provides that a director of the company can inspect the books of accounts. Executive directors usually have access to internal information. Therefore, it may not be incorrect to assume that his provision aims at strengthening the institution of independent directors. Similarly, the Bill has expanded the responsibilities of the audit committee. It has made it mandatory for listed companies to constitute a nomination and remuneration committee with non-executive directors, majority of whom should be independent directors. The Bill provides that independent directors shall meet separately, at least once in a year, to review the performance of non-independent directors and the chairperson of the company, and to assess the quantity, quality and timeliness of the flow of information to the Board. There are many such provisions.

It is not that only regulators are showing increasing faith on independent directors. Stakeholders also depend on independent directors for improving corporate governance. On one occasion, we were discussing who should take responsibilities to set the 'tone at the top' to ensure that the company operates ethically and responsibly. Most felt that the audit committee should take the initiatives. The committee should interact more with senior executives and should examine the incentive schemes for employees at all levels to understand the company's culture and assess whether incentive schemes have the potential to induce employees to adopt en-ethical practices. Although, the audit committee is already empowered to examine incentive schemes and to interact closely with senior executives, they seldom invest significant time on the same. Intensive interaction between independent directors with senior executives might lead to tension.

In spite of the possible dysfunctional effects, the institution of independent directors is to be strengthened and accountability of independent directors should be enforced effectively. It is the responsibility of the independent directors to ensure that a separate power centre is not created within the Board. It is a great challenge. In a seminar, one of the speakers suggested that independent directors should develop healthy relationship with executive directors but they should be cautious that the relationship does not turn into a cozy relationship. This would help to avoid animosity with the management while independence would be protected. It is not easy to set the boundary between healthy relationship and cozy relationship. Independent directors as well as executive directors will be required to demonstrate their leadership qualities and technical capabilities to match the increasing expectations from stakeholders and regulators. The need of the hour is to provide high quality training to existing and potential directors. On the part of directors, they should appreciate new challenges and have the humility to accept that continuing training is a professional obligation.

E-mail: asish.bhattacharyya@gmail.com Affiliation: Professor and Head, School of Corporate governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), The Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited