Sep 9, 2018

Dozing Doorkeepers?

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With recent frauds shaking investors’ trust in corporate governance standards, we look at role, limitations and accountability of independent directors who are custodians of these standards.

After the conflict of interest case involving ICICI Bank CEO Chanda Kochhar came to light, the bank, on March 28, issued a statement defending its credit approval processes and the role of its CEO. “The credit approval authorisation framework is laid down by the Board of Directors. The larger exposures are approved by the Credit Committee of the Board. The majority of Credit Committee members are independent directors of the bank. The Chairman of the Credit Committee, till as late as June 2015, was always a non-Executive Director,” it said.The bank focused on independence of its non-executive directors to convince shareholders, media and others interested in the developments that “there are adequate checks and balances in loan appraisal, rating and approval processes within the bank, both from control as well as from governance perspective.” The issue at hand was a Rs3,250 crore loan to Videocon Group, which had business relations with Chanda Kochhar’s husband Deepak Kochhar.

The statement went on to say that the board did not find any evidence of nepotism or conflict of interest in extending the loan. However, under pressure from various quarters, including CBI and Sebi probes, the bank board finally asked Kochhar to go on indefinite leave till the probe ordered by it is completed. At this stage, questions began to be asked about the role of the bank’s board, especially the independent directors. Many experts say the ICICI Bank fiasco again proved that independent directors, supposed to be custodians of corporate governance, are happier toeing the management line than raise questions on issues concerning governance and minority shareholders.

ICICI Bank is not the only big case where independent directors were found wanting. In May, two Fortis Healthcare investors – Jupiter India Fund, East Bridge Capital Master Fund Ltd – sought removal of four directors, including three independent directors, through an extraordinary general meeting. The investors said the directors had not satisfactorily exercised their fiduciary duties towards all shareholders and failed to maintain the expected levels of corporate governance. The decision to remove the directors came after an allegation that promoters Malvinder Singh and Shivinder Singh siphoned off Rs500 crore from the company without the board’s approval. What happened in Tata Sons last year when independent director Nusli Wadia – who had opposed the then chairman Cyrus Mistry’s ouster – was asked to resign from Tata group companies’ boards, does not give one too much confidence about the institution of independent directors. “The reasons for which I am being sought to be removed as director is my independence of mind and action.. My independent stand has aggravated Tata Sons and my removal is being sought because I chose not to follow their diktat. My fiduciary duty is to your company and not to an unidentified Tata group,” Wadia, himself the chairman of the Wadia Group, had said then. What transpired in Infosys, where founders and investors openly criticised some of the steps taken by the then CEO, Vishal Sikka, forcing him to resign, also came as a shock to many. Here, too, independent directors were caught between the management and the founders, who were gunning for the CEO.

The question is – how independent are independent directors? Are they too overawed by promoters, especially if they are industrialists of repute such as Ratan Tata of the Tata group or N.R. Narayana Murthy of Infosys, that they let them have their say even if that means compromising the interests of minority shareholders? Can they ever be completely ‘independent’?

An Oxymoron

Independent directors are not government or regulator-appointed ‘representatives’ who wield unlimited power independent of the company or its promoters. They are, in fact, appointed by the company itself. Though the law says that the selection of independent directors should be independent of the management, they are selected by the company board, which also comprises chairman, CEO and other executive directors.

“Full independence is too much to ask for; after all, he has been picked up by promoters and the management. They interact with you before they select you,” says Amarjit Chopra, Senior Partner, GSA Associates, and independent director on boards of Rico Automobiles and Tata Power Delhi Distribution Ltd. Though the appointment has to be approved by shareholders, there are few instances of shareholders rejecting such appointments. Shriram Subramanian, Managing Director of InGovern, an independent corporate governance research and advisory firm, says shareholders need to vote for truly independent directors.

Even the search for candidates is done through reference and word of mouth. Most appointees are known to promoters or existing directors or are friends and acquaintances of promoters or directors. It’s a close-knit circle where most people know each other directly or indirectly. “We generally check independence by relations – business or blood relations. But you could be just my friend,” says Pavan K. Vijay, former president of Institute of Company Secretaries of India (ICSI) and founder of Corporate Professionals, a corporate law advisory firm.

While he believes that the process for selection of independent directors is flawed, he thinks the government’s idea of creating a database of independent directors is also not a foolproof solution. “They are talking about creating a database of independent directors. There is confusion as many agencies are working on it. We do not know if you can make it mandatory for companies to select independent directors from that database only. Unless that happens, it cannot give you any solution,” he says.

A provision in the Companies Act, 2013, requires the government to maintain such a database. However, not many believe that this can resolve the issue of independence. “It hasn’t worked effectively in any country. There would be some familiarity between the independent director and promoters. Invariably it happens through a networking circle,” says Shriram Subramanian of InGovern

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