Pratip Kar: Directors’ dilemma

by Pratip Kar for Business Standard, September 13th, 2010.

Vesting independent directors with more responsibilities cannot guarantee better corporate governance.

The Parliamentary Standing Committee on Finance has reviewed the Companies Bill, 2009. Some of its recommendations underpin the importance of independent directors as a critical instrument to nurture the financial health of a company and to protect the interests of various stakeholders, particularly the minority shareholders. The Committee rightly emphasised that safeguards should be put in place in the Bill, so that the independent directors can play their designated role in the boards and help improve the board governance. Two of the Committee’s suggestions that the ministry of corporate affairs, the chambers of commerce and boards of the companies would do well to recognise are: First, “the role of independent directors should be distinguished from other directors in the Bill” and, second, “the appointment of independent directors should not be a case of mere technical compliance reduced to the letter of the law” (source: press release of the Press Information Bureau).

To implement these, the government would need to prescribe the mode of appointment, qualifications, extent of independence from promoters/management, roles and responsibilities and liabilities of the independent directors. What remains to be seen is the manner in which these useful recommendations would be translated into the letter of law, the way the companies would implement these and the direct or indirect monitoring mechanism that the ministry of corporate affairs would put in place.

It is possible that these recommendations may not go down well with a large segment of companies and those who consider the position of independent directors an ornamental post-superannuation perk. These may even give rise to protestations from different quarters that there is a dearth of good people in the country to become independent directors; if these recommendations are implemented, the numbers of willing candidates will decline further. Set in the context of our professed dalliance with GDP numbers and our “all-round growth story”, these refrains would perhaps seem a trifle trite and pedestrian.

But why this emphasis on independent directors? Is this emphasis rational or misplaced? Is it an issue that is being given undue importance? This is clearly a subject of considerable debate with equivocal responses across economies. India is a late entrant in this debate, perhaps after the Satyam episode.(continue reading… )

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