Importance of Independent Directors in Company Boards for Nation's Growth
REPUTATION IS NOT USUALLY THE FIRST WORD WE THINK OF WHEN WE TALK ABOUT BUSINESS STRATEGY. BUT A FOCUS -ESPECIALLY AT THE BOARD-ON REPUTATION AT THE BOARD-ON REPUTATION CAN BE AN EXCELLENT WAY TO STRUCTURE AND SHAPE BUSINESS STRATEGY IN THE TWENTY FIRST CENTURY.
- Dr David Landsman, OBE
In the recent months, a number of businessman fled India duping financial institutions as well as public, many have mounted huge NPAs. All this has happened despite the fact that they were running limited companies listed with major stock exchanges. All this happened despite the fact that the companies were running with structured Board of Directors. Also, Independent Directors were on their Board. So question arises those who were from the family they remained silent due to family interests but what about Independent Directors, why they had not read the warning signals.
In between came a news that government wants to control the damage and put forth a mechanism that minimize the possibilities of such recurrences.As a baby step to evaluate independent directors on boards of companies and ask the National Company Law Tribunal (NCLT) to remove those who have failed to ensure proper oversight. To me, the idea is preposterous. The state does not have the capacity to do this job and any attempt to do it would lead to needless interference in the running of non-state enterprises. The case for amending the Company Act to allow the government to scrutinize independent directors is weak. SEBI as well as RBI already prescribe fit and proper conditions for persons in these roles. All the details of directors are available from the database created through Director Identification Number (DIN). There is no reason for the government to arm itself with powers of oversight over directors of private sector companies. If it has any power of oversight, it is welcome to direct it at many PSUs like Air India and other loss making public enterprises and turn them around.
Independent directors are also in special focus following the recent crisis at the Infra-structure Leasing and Financial Services. The Government has rightly superseded the board and appointed hand-picked professionals to correct the mistakes. It raises questions on the credibility of decisions taken by the previous management. However, it does not follow that government oversight is the remedy. Right under the government's beady eyes, public sector banks have built up a non performing assets burden far heavier than the than who contributes to the corporate governance.
In fact industry leaders like Narayana Murthi, Naresh Chandra, Uday Kotak has envisioned greater role for independent directors.The Independent Directors must not assume a passive role, merely reacting to idea foreseen by the controlling shareholder or their appointee. They must be willing to upset the status quo in the interest of shareholders. The biggest political contribution to corporate governance would be to make political funding 100% transparent, so the companies do not have to create war chests off the books.
There is a big issue on which the industry leaders as well as responsible people in government should collectively debate and arrive at some conclusion : who whether it should be left entirely upon the owners of an enterprise to choose Independent Directors or their should be alternate mechanism for doing so. As the experience tells the Independent Directors picked up by the owners will not be totally Independent. So the best option is government should create an independent statutory body who should keep a database of eminent professionals, experienced bankers as well as ex-bankers, tech experts and as per the requisition from a listed company should nominate Independent Directors. Of course, the procedure may not be 100% foolproof but can minimize the manipulations.
So this way :
- Dr David Landsman, OBE
In the recent months, a number of businessman fled India duping financial institutions as well as public, many have mounted huge NPAs. All this has happened despite the fact that they were running limited companies listed with major stock exchanges. All this happened despite the fact that the companies were running with structured Board of Directors. Also, Independent Directors were on their Board. So question arises those who were from the family they remained silent due to family interests but what about Independent Directors, why they had not read the warning signals.
In between came a news that government wants to control the damage and put forth a mechanism that minimize the possibilities of such recurrences.As a baby step to evaluate independent directors on boards of companies and ask the National Company Law Tribunal (NCLT) to remove those who have failed to ensure proper oversight. To me, the idea is preposterous. The state does not have the capacity to do this job and any attempt to do it would lead to needless interference in the running of non-state enterprises. The case for amending the Company Act to allow the government to scrutinize independent directors is weak. SEBI as well as RBI already prescribe fit and proper conditions for persons in these roles. All the details of directors are available from the database created through Director Identification Number (DIN). There is no reason for the government to arm itself with powers of oversight over directors of private sector companies. If it has any power of oversight, it is welcome to direct it at many PSUs like Air India and other loss making public enterprises and turn them around.
Independent directors are also in special focus following the recent crisis at the Infra-structure Leasing and Financial Services. The Government has rightly superseded the board and appointed hand-picked professionals to correct the mistakes. It raises questions on the credibility of decisions taken by the previous management. However, it does not follow that government oversight is the remedy. Right under the government's beady eyes, public sector banks have built up a non performing assets burden far heavier than the than who contributes to the corporate governance.
In fact industry leaders like Narayana Murthi, Naresh Chandra, Uday Kotak has envisioned greater role for independent directors.The Independent Directors must not assume a passive role, merely reacting to idea foreseen by the controlling shareholder or their appointee. They must be willing to upset the status quo in the interest of shareholders. The biggest political contribution to corporate governance would be to make political funding 100% transparent, so the companies do not have to create war chests off the books.
There is a big issue on which the industry leaders as well as responsible people in government should collectively debate and arrive at some conclusion : who whether it should be left entirely upon the owners of an enterprise to choose Independent Directors or their should be alternate mechanism for doing so. As the experience tells the Independent Directors picked up by the owners will not be totally Independent. So the best option is government should create an independent statutory body who should keep a database of eminent professionals, experienced bankers as well as ex-bankers, tech experts and as per the requisition from a listed company should nominate Independent Directors. Of course, the procedure may not be 100% foolproof but can minimize the manipulations.
So this way :
1. Independents will be impartial
An independent director will not be as closely tied to the company as executive and investor board members; this will allow the independent director to be more impartial and objective. Independent directors thus “still beholden to shareholders, but will try to be more objective as far as moving the company in a beneficial direction. An independent board member’s job is to look out for the well-being of the company and the shareholders’ interests first.
2. Independents want to be there
In case of a startup having only investors on the board of directors, it runs the risk of having board members whose attention is split between many boards of companies they’ve invested in. Many variables can impact their level of engagement, e.g.,how much money they or their firm has invested, how important the company is to their portfolio. An independent board member can bring focus and depth of perspective about your industry, company.
3. Independents can bring expertise to bolster where the company has room to grow
With an independent expert, the company gets the chance to select an expert in a specific area where the company wants to grow (e.g., going public or scaling/growth), or an area that has become more urgent due to market changes, new opportunity or an adverse situation. This can be especially important when the company got a small board and are early in it’s life cycle. By bringing in a specific expertise early through the independent, the company can take advantage of growth opportunities and potentially avoid costly mistakes.
Will Herman, a serial entrepreneur, explains in Brad Feld’s book 'Startup Boards , “Creating and running a startup can be stressful and time consuming . . . Since the outside director should have loads of operational experience and will often have specific industry knowledge, chances are he/she has experienced almost everything the CEO will go through. Who better to listen, advise and counsel?”
4. Independents are the key to conflict resolution
An independent board member is able to play a pivotal role in neutralizing any conflicts that arise among the board. The Boardlist founder Sukhinder Singh Cassidy believes that “an independent director can often be a bridge builder in difficult conversations.”
Will Herman adds, “Sometimes there are just some deep, fundamental disagreements between the management team and the company’s investors . . . Even if the outside director strongly supports one of the perspectives, since they are close to both sides, they are in a unique position to cut through to the core issues and find agreement much faster.”
An independent director will not be as closely tied to the company as executive and investor board members; this will allow the independent director to be more impartial and objective. Independent directors thus “still beholden to shareholders, but will try to be more objective as far as moving the company in a beneficial direction. An independent board member’s job is to look out for the well-being of the company and the shareholders’ interests first.
2. Independents want to be there
In case of a startup having only investors on the board of directors, it runs the risk of having board members whose attention is split between many boards of companies they’ve invested in. Many variables can impact their level of engagement, e.g.,how much money they or their firm has invested, how important the company is to their portfolio. An independent board member can bring focus and depth of perspective about your industry, company.
3. Independents can bring expertise to bolster where the company has room to grow
With an independent expert, the company gets the chance to select an expert in a specific area where the company wants to grow (e.g., going public or scaling/growth), or an area that has become more urgent due to market changes, new opportunity or an adverse situation. This can be especially important when the company got a small board and are early in it’s life cycle. By bringing in a specific expertise early through the independent, the company can take advantage of growth opportunities and potentially avoid costly mistakes.
Will Herman, a serial entrepreneur, explains in Brad Feld’s book 'Startup Boards , “Creating and running a startup can be stressful and time consuming . . . Since the outside director should have loads of operational experience and will often have specific industry knowledge, chances are he/she has experienced almost everything the CEO will go through. Who better to listen, advise and counsel?”
4. Independents are the key to conflict resolution
An independent board member is able to play a pivotal role in neutralizing any conflicts that arise among the board. The Boardlist founder Sukhinder Singh Cassidy believes that “an independent director can often be a bridge builder in difficult conversations.”
Will Herman adds, “Sometimes there are just some deep, fundamental disagreements between the management team and the company’s investors . . . Even if the outside director strongly supports one of the perspectives, since they are close to both sides, they are in a unique position to cut through to the core issues and find agreement much faster.”
5. Independents can mentor and share their network
While all board members can help to mentor the CEO and executive team of the company, an independent can be specifically helpful for skills or perspective needed by executive team. Through casual or more formal conversations, an independent director can be the key to a more sane management team.
In the times of stress, an independent director may also be someone with networking ability and other resources. It may be necessary to bring in specialist advisers — strategy consultants, lawyers, accountancy firms, investment bankers, tax specialists, remuneration consultants, head hunters — to help. The independent board member needs to have a network of contacts to assist or enhance these needs.”
So, the key is that Independent Director should be Independent in absolute term not merely handpicked of the owner of the company.
While all board members can help to mentor the CEO and executive team of the company, an independent can be specifically helpful for skills or perspective needed by executive team. Through casual or more formal conversations, an independent director can be the key to a more sane management team.
In the times of stress, an independent director may also be someone with networking ability and other resources. It may be necessary to bring in specialist advisers — strategy consultants, lawyers, accountancy firms, investment bankers, tax specialists, remuneration consultants, head hunters — to help. The independent board member needs to have a network of contacts to assist or enhance these needs.”
So, the key is that Independent Director should be Independent in absolute term not merely handpicked of the owner of the company.
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