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Total Number of Subscribers: 426 |
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Date: 24 May 2008 |
Compiled by Mr. M. Sathya Kumar |
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Towards An
Independent Board " While SEBI has done well to
protect the investor by instituting Clause 49, concerns regarding the
provision as law & compliance in letter & spirit deserve attention
" Somewhere in the latter half of the timeline
you just saw – on 31 May 2007 — the Sensex
crossed $1 trillion in market capitalization. While the euphoria
surrounding this milestone is understandable, issues revolving around
shareholders’ interests – particularly those of the small guy — assume greater significance now
than ever before. The
Securities and Exchange Board of India has done a commendable job of trying
to protect the investor through the provisions on independent directors
contained in Clause 49 of the standard listing agreement with the stock
exchanges. However, concerns regarding the implementation of the provision as
law, and compliance in letter and spirit deserve attention. Why
independent directors The Board
of Directors plays a fiduciary role of protecting shareholders’ interest by providing adequate
information on the company’s management, which is, for all practical purposes, the custodian of
the money that the shareholders have invested in the company. The board must
be adequately populated with qualified and competent independent directors
who will have no conflict of interest with either the management or the
business per se and will therefore be in a position to safeguard investor
interests impartially. Such a
director, apart from instilling shareholder confidence, will also be able to
bring his expertise to the table and enhance value for the company he
represents. Sebi’s definition Clause 49
says independent directors must comprise at least 50% of a company’s board if its chairman is an
executive director and 33% if the company has a non-executive chairman. In
its latest definition, the market regulator says an independent director is
one who: a. Apart
from receiving the director’s remuneration, does not
have any “material” pecuniary dealings with the
company, its promoters, its directors, its senior management or its holding
company, its subsidiaries and associates. b. Is not
related to promoters or directors or to persons at one level below the board. c. Has not
been an executive of the company in the preceding three financial years. d. Is not currently,
and wasn’t during the preceding three years, a partner or executive of a statutory or internal audit firm, or legal or
consulting organization associated with the company. e. Is not
a vendor, customer, lessor or lessee of the company. f. Owns
less than 2% of the voting shares. Sebi has defined
the term “relative” as per Section 2(41) and Section 6 read with Schedule IA of the Companies Act, 1956. Why
independence was lost Companies
had a great deal of reservation about Sebi’s definition
of an independent director, with several saying
they would be unable to meet the compliance deadlines, as they’d find it extremely difficult to find people who fit the bill and populate half their boards with them. This,
despite reports in sections of the media about the abundance of eligibles.
One report says as many as 10,450 professionals have offered their services
for the job on a popular website. Another
area of confusion was the continuing independence of such people once they
joined the board, if they already held similar positions in other companies.
The corporate view here was that independence risked being substantially
diluted in case a director represented two companies in conflict with each
other. What
companies did not say, probably intentionally, was that The Companies Act,
1956 does have a provision to deal with such a situation. It bars the
director from participating or voting in Board proceedings under Section 300
in case such a situation arises. Another
set of companies exploited loopholes in the definition to adhere to the law
in letter, but circumvent it in spirit. Here are some of the ways they did
this: • Companies used the lack of clarity in the definition of the term “relative” to appoint those not
related by blood on their boards. • The original clause didn’t dwell on the
qualifications of an independent director, making it
easy for companies to appoint people prone to be influenced by the promoter
or management. • The provision permitting a board with a non-executive chairman to have only
33% of its members independent saw several companies appoint their own
promoters or “men” as non-executive chairmen. The market
regulator’s provisions relating to independent directors were
diluted when the Ministry of Corporate
Affairs said that only 33% of the board of any listed company should consist
of independent directors instead of 50%. The
panacea • Sebi should have the power to prosecute non-compliant companies and impose
penalties • A fair degree of co-ordination between the Ministry of Corporate affairs and
the market regulator is needed to ensure they speak in the same voice • The Companies Act allows a person to serve on the board of fifteen companies
at the same time. This number should ideally be reduced to five, so he can
efficiently execute his responsibilities instead of just attending board
meetings. This would also reduce the number of cases in which one person
serves on the boards of two companies in conflict with each other • Independent directors should be vested with the power to change the top
management. This was observed in the case of the erstwhile Compaq
Corporation, in which the CEOs were sacked twice for non-performance. • Qualifications of the independent director need to be clearly
defined. Even the term “professional” can be deliberately
misconstrued to appoint celebrities, whose
contribution to the objective of investor protection hasn’t really been proven. The
author Vikas Verma is the president and CEO of Nirvana Advisory Group Pvt.
Ltd Delhi-based consulting organization focused on corporate governance Article
earlier appeared in Mint - A financial Daily |
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