With the government notifying new rules for the appointment of independent directors (IDs) for public sector banks (PSBs), public sector insurance companies, Reserve Bank of India (RBI) and financial institutions (FIs), it has become clear that the government wants to alter the level ofcorporate governance practised in these boardrooms. However, many experts familiar with the functioning of these companies’ boards feel that it might not be enough to change the status quo and more needs to be done to change the governance structure in the boardrooms.
So what has changed?
While the Companies Act, 2013, which was implemented last year, was one step forward to give IDs more power, they were much more broadly defined – focusing more on the duty on the ID to ensure that the interest of all stakeholders are protected; particularly minority shareholders.
According to Companies Act, 2013, an ID should be a person who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience. Further, he/she should also possess ‘appropriate skills, experience and knowledge’ in one or more fields of finance, law, management, sales etc.
On the other hand, the rules recently notified for PSB, FIs, RBI and insurance companies have a much more focused tone – giving them a tenure of six years, asking for a minimum 20 years of experience from persons coming from industry, putting an age restriction at 67 years.
Moreover, the government officials who have 20 years of experience with 10 years at joint secretary or above; retired chief managing directors/executive directors of PSBs after one year of cooling period; academicians, chartered accountants and professors with more than 20 years experience ; will be the only eligible ones to apply.
“The normal expectation globally of the role of an Independent Director is essentially two-fold: advisory and monitoring,” said an expert who did not wish to be named.
“While the Companies Act focuses more on the ‘monitoring’ part – asking ID to ensure the interest of all stakeholders; particularly minority shareholders; the rules for ID appointment in state-run banksand insurance companies envisage him/her more as a ‘strategic advisor,” the expert added. ” For example, one of the acceptable qualifications of an independent director is that he or she led a reputed organisation or brought turnaround in a failing organisation.” Read more here.