True test of independent directors lies in their integrity, not box-ticking

At the recent Annual Directors’ Conclave, Securities and Exchange Board of India (Sebi) Chairman Tuhin Kanta Pandey delivered his assessment of Indian boards, urging them to swap ceremonial formality for intellectual grit. His central metaphor was that companies are ships with CEOs at the helm, but who watches the compass for “ethical fog” and “regulatory icebergs”? Governance, in his view, is less about ticking boxes and more about steering a corporate “ship” through geopolitical squalls, technological disruption, and fickle public opinion. 

Despite India’s robust regulatory framework —strengthened by the 2013 Companies Act and Sebi’s listing regulations — the chairman identified a troubling gap between structure and spirit. While the governance foundation is sound, boards too often confuse “compliance with culture.” Independent directors are appointed but do not feel empowered; diversity is counted, not heard. Too many treat governance as mere box-ticking rather than living the values, serving as “honorary appointees” rather than genuine stewards of accountability. 

Boardrooms should not be comfortable places: Mr Pandey prescribes four key shifts for corporate governance: Treat culture as seriously as balance-sheets; recruit independent directors from beyond cosy networks, and equip them to dissent; harness technology for real-time risk dashboards; and embrace cognitive diversity to provoke better decisions. “A board that never disagrees is not aligned — it’s asleep,” he said. The boardroom, as the governance adage tells us, should not be a comfortable place. 

The boardroom of the future, according to him, should be a learning organisation that earns trust by asking uncomfortable questions. In an era of AI-driven decisions and viral reputational risks, analogue boardroom tools prove inadequate. The real governance test comes not during steady growth but when crises strike. Then, governance is measured not by policy manuals, but by the calibre and courage of those around the table. 

Effective boards: Executing on this is key, but there are at least two intractable questions: What makes boards effective? And what constitutes true independence? Are boards with independent chairs more effective than boards where the chair and CEO roles are combined? Are larger boards more effective or smaller ones? What role does a director’s age play in this mix? Their professional qualifications? As David F Larcker and Brian Tayan have observed, “(a) cottage industry of correlation-hunting has yielded disappointingly little. Most structural features show no meaningful relationship with corporate outcomes.” The authors also highlight the gaps around board practices. How does information flow between management and directors? What distinguishes effective board leadership from ceremonial box-ticking that the chairman rightly worries about? Boards unfortunately cannot be scrutinised by those sitting outside the boardroom. 

Consider the recent case of IndusInd Bank, where the board is believed to have been kept in the dark about accounting shenanigans and their impact on the bank’s profitability. This incident also brings focus to oversight and information flow, which vary widely across boards and companies. The Reserve Bank of India’s directive for banks to log time spent on each agenda item is aimed at this, but like giving students a textbook, it doesn’t guarantee they will read or understand it. 

Board independence: This is governance’s holy grail. The Companies Act 2013 and Sebi’s Listing Obligations and Disclosure Requirements (LODR) regulations both provide detailed definitions of independent directors. The Companies Act defines independent directors by what they are not. They cannot have any material pecuniary relationships or transactions with the company, its promoters, directors, or senior management that could compromise their independence; they cannot have been employed by the company or its associates for the past three financial years; they cannot be a promoter or related to promoters; they cannot have a material pecuniary relationship with the company that constitutes more than 2 per cent of its turnover; they cannot be substantial shareholders defined as 2 per cent or more equity shares; they cannot have close family members in key management positions; they cannot be former employees of the company without a mandatory cooling off period. There are a few other red lines. 

Sebi’s LODR regulations build on this foundation, outlining the responsibilities of independent directors in listed companies to ensure transparency and protect minority shareholders’ interests. Regulations specify that at least one in three directors on the board (and in some circumstances, one in two) must be independent, ensuring meaningful oversight. 

Despite the reliance on independent directors to look out for minority shareholders’ interests, most legal frameworks do not mandate that independent directors on public companies be directly elected by minority shareholders themselves — although many countries, including Chile, Mexico, and Sweden , are attempting to address this. Our own Ministry of Corporate Affairs seeks to address this by maintaining a database of directors centred on an online proficiency self-assessment test. These tests fundamentally misunderstand independence by conflating regulatory knowledge with independent judgement. This approach ignores boardroom psychology, social pressures, and relationship dynamics that truly determine whether directors can challenge management effectively. Independence requires courage and behavioural integrity that cannot be tested online, while the system fails to address how directors are selected and the subtle forces that compromise genuine oversight. 

However, the process of selecting independent directors continues to attract criticism. To paraphrase from another context: If independent directors did not exist, we would have to invent them. And as another governance adage reminds us, independence is in the mind — it is the willingness to challenge, question, and dissent when necessary. These gaps matter enormously. As the Sebi chairman observed, governance failures often stem not from inadequate policies but from human failings around the boardroom. Until we move beyond structural bean-counting towards understanding the practices and psychology that drive board behaviour, corporate governance will remain more art than science — and shareholders will continue paying the price. 

The author is with Institutional Investor Advisory Services India. The views are personal.  X: @AmitTandon_In