In fact, just a couple of days ago, Kothari was terribly upset over the ‘look-out’ notice issued by the Andhra Pradesh Police against his friend and one of the oldest investment bankers in the country, Nimesh Kampani, Chairman, JM Morgan Stanley. Kampani was an independent director in Nagarjuna Finance that is now caught in a storm for not having paid back deposits raised from the public. “Kampani is not a criminal. He had quit the Nagarjuna Finance board in 1999. As things stand, it is so difficult to find independent directors. With events like these, you can expect many of them wanting to resign,” he says.

Finding independent directors is kind of both easy and difficult. Easy, because the Companies Act does not prescribe any qualification or eligibility. In India, retired bureaucrats, chartered accountants, friends of promoters, political persons, etc., get a quick berth on company boards. And difficult, if companies are serious about corporate governance. Independent directors, anyway, make sense only if they are well-educated, can add value to the company, be independent of promoters’ influence despite being paid by them, and represent minority shareholders’ interests.

T.V. Mohandas Pai, who is a working director on the board of Infosys Technologies Ltd—a firm globally reckoned for its ethical ways—since May 2000, says, “To get quality people on the board as independent directors, companies must not only be willing to provide adequate compensation in line with market practices, but also fully empower them and put in place an efficient instititutional framework for them to work.”

But, most companies in India do not have a framework for independent directors. They want people who echo the promoter-director. Subir Raha, former chairman and managing director of state-owned oil and gas giant ONGC says, “Some independent directors on the board of public sector undertakings open their mouth only to sip tea.” And, it is just as well they do so. “They are just completely unfit,” he says. Raha was one of those public sector chiefs who took on his political boss, Mani Shankar Aiyar, who as petroleum minister in 2005, thrust on him a ‘political’ list of four independent directors.

A CEO of a Mumbai-headquartered public relations firm that has about 250 corporate clients says, “If the public sector is bad, the private sector is no good. Most independent directors are promoters’ men. Their job is to merely attend board meetings and sign documents. My dip-stick survey shows 60 per cent of independent directors in India are retired—by age, physically and mentally.” He cites the high-profile board of Jet Airways, India’s largest private airline that has Shah Rukh Khan, producer Yash Chopra and noted lyricist Javed Akhtar as independent directors. In fact, according to CMIE’s Prowess database, Khan has not attended a single board meeting since he came on board Jet in August 2006.

AN ‘INDEPENDENT’ DIRECTOR

In India, over 90 per cent of companies are promoter-run. And their boards comprise members who are picked by the promoter himself. The Companies Act does not specify the qualities or mention the qualifications for an independent director. “It only has a negative list of the kind of people who cannot be independent directos,” says Prithvi Haldea, chairman and managing director of Praxis Consulting, which manages a repository of information on India’s capital markets. Derek Higgs, who chaired a British government panel in 2002 to review the role and effectiveness of non-executive directors, says they need to be sound in judgement and have an inquiring mind. The now-famous Higgs report says they should question intelligently, debate constructively, challenge rigorously and decide dispassionately.

An independent director, according to former Securities and Exchange Board of India (SEBI) chairman M. Damodaran, must be competent, knowledgeable and bring fresh perspective and business acumen. “The most important requirement is his ability to stand up for minority shareholders, who are not represented on company boards,” says Haldea. Omkar Goswami, Chairman, CERG Advisory, a research and consulting organisation, says an independent director has a well-defined role. “In the long term, he needs to increase shareholder value, ensure that rights of minority shareholders are not in any way diluted and monitor that the companies do things in a legal and ethical manner.”

AN EXTINCT BREED

“In India, promoters have appointed third-grade people just to fulfil the SEBI and Companies Act requirement,” says Haldea, who is also a member of SEBI’s primary market advisory committee. The Companies Act requires at least a third of the board members to be independent. “Independent of whom?” asks Haldea, adding, “As long as they are appointed by management, the concept of independent directors is a myth.” According to him, such a person must be ‘independent’ of the promoter because promoters in control may take decisions that are not in the interest of small shareholders. So, is there a case for government or regulator-appointed independent directors? “Maybe, yes,” he says.

Not many agree. Pai says a company is a collection of interest. “So, an independent director must keep in mind the interest of all stakeholders. If he represents the particular interests of say, minority shareholders, he will squeeze out the employees or customers—equally important stakeholders,” he says. Infosys has experts on global strategy, finance and accomplished academics on its board. Haldea, however, wonders why such people must be brought in as independent directors when they can be hired. “The truth is, in India, not many promoters care for small shareholders,” he notes. Goswami, not quite on the same page as Haldea, however, agrees that ‘good’ independent directors are hard to find. “Maybe just 50-60 companies in India have quality boards,” he says. The universe of listed companies is at least 30 times this. But Goswami says, “If these 50-60 companies account for 85-90 per cent of India’s market capitalisation, then I am fine.” Government-appointed directors, though, will be akin to government control.

There are a few companies such as Infosys that have raised the bar on corporate governance. The company appointed Deepak Satwalekar, MD and CEO of HDFC Standard Life, as its lead independent director in June 2003. He is authorised to call a separate meeting of Infosys’ independent directors without any representative from the management. They can hire consultants, lawyers or experts to independently evaluate the management’s decisions.

SEBI, GOVT SILENT

In 2005-06, Damodaran, then the SEBI chief, went on a hot pursuit of companies that did not bother to comply with Clause 49 of their listing agreement with the stock exchanges. The clause stipulated that independent directors must make up 50 per cent of their boards. “I sent notices to the top five public sector undertakings to convey the seriousness,” says Damodaran. But, SEBI lost steam in due course. Corporate India cried hoarse that there were not enough independent directors.

Haldea rubbishes this argument. He had, in 2005, set up a website for professionals willing to offer their services as independent directors, after CEOs complained at a CII conference in Mumbai that there is a shortage of 30,000 such people in the country. Almost 18,000 professionals are registered on his site. “Only 100-odd directors have been placed,” he says.

C.B. Bhave, Chairman, SEBI, has so far stayed clear of the independent directors issue. SEBI has powers to suspend companies from being traded on stock exchanges if they do not adhere to the Clause 49 of their listing agreement with stock exchanges. Perhaps, the scale of non-compliance is holding back the market regulator from acting now.

The Corporate Affairs Ministry has also stopped worrying after putting in place the Companies Act. The Act limits professionals from being independent directors in more than 15 public limited companies, including listed and unlisted. “I think, a working professional can at best manage 10,” says Goswami, a sought-after independent director, who is on the board of seven listed companies including Infosys, IDFC, Sona Koyo and one unlisted company besides his own. Haldea says, “Maximum five.”

VALUE FOR INDEPENDENCE

The cumulative compensation of all independent directors in a company, according to the Companies Act, cannot be more than 1 per cent of the net profits. Some of the prominent independent directors in corporate India earn a neat sum. For instance, N Vaghul earned Rs 43,30,000 in the last year from his directorship in five companies: Wipro, Piramal Healthcare, ICICI Bank (as chairman), Himatsingka Seide (as chairman) and Apollo Enterprises, according to the Centre for Monitoring Indian Economy’s Prowess database. Goswami earned over half a crore rupees from being an independent director in just two companies, Infosys and Sona Koyo, data for which is available in Prowess. Rama Bijapurkar, leading marketing strategist and expert in consumer behaviour, earned Rs 70 lakh last year from her independent directorship in a clutch of companies including Infosys, Axis Bank, Godrej Consumer Products and Crisil. But they bring a lot to the table.

Rajeev Chandrashekhar, President, Federation of Indian Chambers of Commerce and Industry, says there should be some guidelines on who can be an independent director. But, finally, it is for corporate India to realise that boards need to be transformed for their own good. There is only so much that law and regulations can do. Following them in letter and spirit is for companies to decide.

T.V. Mohandas Pai, Director, Infosys

“To get good independent directors, companies must empower them and have an efficient instititutional framework for them to work.”

Prithvi Haldea Chairman /MD, Praxis Cons.

“Independent of whom? As long as they are appointed by the management, the concept of independent directors is a myth.”

Omkar Goswami Chairman, CERG Advisory

“Maybe just 50-60 companies in India have quality boards. But if they account for 85-90 per cent of India’s market cap, then I am fine.”

Stock of independent directors in India: 6,500. At least 400 are retired IAS officers serving in many boards.

The most sought-after independent directors N Vaghul (Rs 43.30 lakh) Omkar Goswami (Rs 50 lakh) Rama Bijapurkar (Rs 70 lakh) Figures in brackets are total remuneration from their board positions in various companies for the year ending March 2008