Mr X, an independent director, goes around with a long face these days. The reason for his unhappiness is simple: The new Companies Act has taken away certain privileges he has been enjoying for years. For example, he has served on the boards of at least two companies for over 20 years, but he has to let go of them since the Act has imposed a maximum term of 10 years (two consecutive five-year terms). He can be eligible for reappointment only after a three-year cooling-off period.
Mr X, of course, is not alone. According to a study conducted by proxy advisory firm InGovern for corporate governance structure at the country's top 100 companies as on March 31, 2013, at least 10 independent directors have served for a tenure of 20 years or more on company boards, while 10 others hold such positions on boards of 10 or more companies. Some of the marquee names are: Nusli Wadia (34 years as independent director on Tata Steel board), M L Bhakta (28 years in Ambuja Cements), T K Balaji (27 years in Titan Industries), M L Apte (26 years in Grasim Industries) and Yogendra P Trivedi (21 years in Reliance Industries).
Another reason for Mr X and some of his board colleagues' unhappiness is the ban on stock options for independent directors, though the new law allows profit-related commission, higher fees and reimbursement of expenses for participation in the board or other meetings. Mr X thinks he stands to lose substantially since he won't be eligible for stock options any more. Consultants say this is an illogical move and it would have perhaps been more relevant to place restrictions either on the total amount of options or put a time limit on exercising these options.
To defend his point, Mr X cites the practice abroad where stock options are allowed for independent directors. For example, in the UK, such directors can hold shares up to a fixed amount. The US goes one step forward and allows substantial shareholding since the country's regulators do not view ownership of even a significant amount of stock, by itself, as a bar to an independence finding.
Many in India, however, say allowing stock options for independent directors would heavily compromise their independence since they would develop a vested interest. India Inc seems to have a mixed view on this. While many big companies have given generous stock options to their independent directors (to be fair, there is no evidence to suggest that their independence has been curtailed because of this), some others prohibited it. For example, in May 2008, Life Insurance Corporation removed two of its nominee directors on the board of Larsen & Toubro after it was found that they had got shares worth a combined Rs 8 crore under an employee stock option scheme.
India Inc also points out other, though smaller, problems, too. A leading tax practitioner, who is on the boards of several Indian companies, talks about a peculiar issue independent directors would face, courtesy the new Act. According to the Act, such directors will have to meet at least once a year, without the presence of executive directors and management members to examine internal controls and general governance practices. The tax practitioner says he is getting hundreds of queries from mid-rung companies, all wanting to figure out how this will work since the Act is silent on details. For example, who will convene and preside over these meetings? Should the independent directors take turns in convening these meetings? Is it compulsory to keep minutes of these meetings? If yes, should the company be asked to organise and pay for an external guy who can maintain secrecy?
The tax practitioner says these issue may seem trivial but can be real problems for relatively smaller companies. Bigger companies such as Infosys have solved this problem by introducing the concept of lead independent directors who preside over these separate meetings. This system is already prevalent in many countries. After the Sarbanes Oxley Act was passed, the stock exchanges in the US amended their listing rules to provide for a compulsory meeting of independent directors separately. Nasdaq listing rules require independent directors to have these meetings at least twice a year. The UK Corporate Governance Code also provides for meetings of the non-executive directors led by a senior independent director at least annually to appraise the chairman's performance and on such other occasions as are deemed appropriate. Many smaller Indian companies, however, say such practices should have been implemented gradually rather than at one go and they perceive this as yet another bureaucratic exercise that has been thrust on them. "It's difficult to get enough independent directors; who will give us lead independent directors?" is the question from a CEO.
The bigger question, however, is whether the new Companies Act can change the fundamental problem since boards historically have been a network of influence for promoters, so family and businessmen friends are often nominated as independent directors, leading to a cosy relationship in which both objectivity and independence are lost. Law, as the tax practitioner, says can hardly change people's minds.
Disclaimer: These are personal views of the writer. They do not necessarily reflect the opinion of www.business-standard.com or the Business Standard newspaper
