Mirage of independence
Ashok V Desai
On the recommendation of the committee on corporate
governance that it had appointed under Kumaramangalam Birla, Sebi asked stock
exchanges on 21 February 2000 to insert a new Clause 49 into their listing
agreements with companies. It had about 2000 words. Then it appointed another
committee to go over some of the same ground under Narayana Murthy; following
its recommendations, Sebi revised Clause 49 in 2003. Then in October 2004, it
sent yet another version to the stock exchanges; this is about three times as
long as the original one.
However, it is not the frequent
revisions that have upset company managements; it is the crucial feature of the
2000 model Clause 49 which they have put off implementing till now and which
Sebi threatens to enforce: that half of the board must consist of “independent”
directors, with the proviso that an independent chairman would count as a third
of the board whatever its size. An independent director is defined negatively
as one who has no material pecuniary relationship or transactions with the
company or people and businesses related to it, is not related to promoters or
senior managers, is not a vendor, customer, lessor or lessee of the company,
does not own more than 2 per cent of its shares, and has not been an executive
in the company or firms of its auditors, consultants and legal advisers.
Companies fear that it will be difficult to find so many independent directors at
such short notice, and that there is going to be a great shortage of them.
This contention is obviously
untenable: if a company cannot find three independent directors in five years
in a country of a billion people, three-quarters of whom have no pecuniary
relationship beyond their employer, corner shop and moneylender, it has simply
not tried. So the companies’ concern is something inexpressible: they have some
other qualification that is difficult to combine with all the sterling negative
features above. What is this rare quality they are looking for?
Let us take two extreme cases. A
company may be in the business of building roads in Bihar; its promoter may be
worried that an independent director will expose the bribes he has to pay to
local strongmen. Or a company may be squeaky clean; its promoter may worry that
an independent director will ask him to give dealerships to people of his
choice and collect bribes from them. I once asked an executive in one of the
latter companies if it had never paid a bribe. He thought about it, and said
that sometimes it paid for unavoidable and insistent potential nuisances to go
and visit places of pilgrimage, just as George Fernandes did for Justice
Phukan. No company in India, however clean, can avoid dealing with unavoidable
and insistent potential nuisances; what a promoter does not want is to have
them on the board. In other words, any business that survives in India works
out a business model; the promoter wants directors who accept the model, and do
not either sabotage it or bring in their own.
I believe they can find such
directors; they only have to look amongst teachers, pilots, doctors, cricketers
– and journalists. It is necessary that independent directors should have no
pecuniary relationship with any company – just that they should not have it
with the company they direct. The problem is eminently soluble; all it requires
is creation of a database. If companies cannot do it for themselves, I am
prepared to do it for them.
But I also think the whole
exercise is futile. As I said, any promoter can find enough independent yesmen
by exercising some diligence. But even if he could not or would not, he has
nothing to fear from independent directors. There was a time when promoters’
share in their companies equity was small. In the last ten years, however, they
have raised it considerably; today, they effectively own the companies they
manage. In the circumstances, independent directors can have little influence
on their conduct. Just look at Anil Ambani; after an eight-month campaign, what
has he achieved?
If Sebi were serious or intelligent
or both, it would make just the opposite rule: it would insist that these
so-called “independent” directors must have at least 5 per cent of the stock.
And it would make all companies give a seat in the board to the top five
shareholders other than the promoter. But our Sebi is too much under the thrall
of Sarbanes-Oxley; it has no space for common sense.
