Independent directors fail -Editorial

The role of independent directors needs to be scrutinised more closely after their complicity — or indifferent attitude — in the decision
by Satyam’s promoters to buy out two family-owned companies. It is surprising that one independent director, who also heads a prestigious business school, asserted on a news channel that the decision taken by the board was in good faith!

He also defended the board’s decision, even though it had to be withdrawn under pressure from non-promoter shareholders. One is left wondering what is the level of due diligence independent directors on board of companies exercise. Do they reckon their responsibility ends with complying with a checklist?

The whole idea behind mandating independent directors was to ensure companies follow good corporate governance practices and protect interests of minority shareholders. They are required to exercise oversight to prevent wilful compromise of the interest of other stakeholders.

It is unfortunate that in many instances companies have made a mockery of the statutory provision requiring appointment of independent directors. Many appoint their friends and high profile names (read, consultants) who lack the qualification to become independent directors. Some government owned companies too are guilty of such practice.

The saving grace is that institutional investors
and minority shareholders have acted to ensure good corporate governance practices are not compromised. Minority shareholders have acted to protect their interest earlier too: in Sterlite Industries, where the management proposed to demerge certain units of the company, and in DLF where promoters tried to deny minority shareholders participation in the rights issue.

These instances of promoter high-handedness does not necessarily call for tighter corporate governance codes. We have enough laws in place. Clause 49 of the Listing Agreement, are on par with those in other parts of the world. What is required at this stage is that our companies follow the law in spirit and not in letter alone.

In addition, the small investor protection forums need to be promoted and strengthened to give minority shareholders a platform to seek a redressal of their grievances.