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.

... contd.