Becoming of Next Generation Corporate Governance

By Ashish Makhija

Has corporate governance transformed the way the corporate function only an empirical study would measure this up. This takes us to another question- whether corporate governance can be measured. There have been few theories floating around for measuring corporate governance, gratifying the ardent statistically oriented fans. The. Theories aside, the practical realities of business environment have taught the corporate directors away to judge the efficacy of corporate governance in an organization.

Corporate governance  has been brought to the boardrooms by multitude of laws, rules regulations, guidelines, principles et al in a codified manner. The directors individually and the board of directors collectively, often struggle to comply with these codifications. With the sword of regulator hanging over their head the directors either become too aggressive or too defensive. Without doubt, the directors particularly independent  directors have a responsibility to act as custodian of the stakeholders if this responsibility becomes onerous the reaction becomes unpredictable. The board room discussions have shifted gears over the years with the years with the onset of corporate governance’ environment and the focus remains on what the independent directors say on the items discussed at meetings.

The concept of independent directors has assumed greater significance today with the onset of corporate governance in the era of dynamism the concepts and perceptions change as frequently as the seasons change. The composition of board of companies in which public  interest is involved is a subject matter of considerable debate and discussion a greater emphasis is being laid on transparency in governance and management. The way the board functions affects the entire corporate culture the impact and effect of which is also discernable on the economy.

In an ideal situation pressure on and of the independent director would adjust itself with agenda subjects being discussed in a free, fair and transparent manner. Many a times the directors take a deep passionate stand on an issue based on a theoretical perspective ignoring the real- world business aspects. The reasons do not matter in such situations and the free and fair discussion takes a back seat. The independent directors assume themselves on the opposite side of the independent directors assume themselves on the opposite side of the promoters and those managing the affairs of the company the feeling of suspect takes away the real import of the corporate governance. The independent directors assume to play a role of policemen in civil clothes.

The extreme position adopted by independent directors does on good to the corporate they purport to serve. Such a stiff position adopted by the independent directors behave in this manner, one explanation could lie in the codified corporate governance practice regulations. In an attempt to comply with whole gamut of regulations by large number of regulators, which more often than not contradict each other the directors lose sight of the purpose for which they are supposedly brought on the board the compliance issues remain at the sub-conscious level of the directors. The fear of their consent going wrong pushes them to take strong positions bereft of reasons. The conservative approach leads to loss of business opportunities.

On the other side there are directors who may be extremely liberal in approach and support the directors, as they are often called, assume themselves in the role of CEO the perspective becomes flawed and the lines between governance and management narrow down. The independent directors look at any proposal through the eyes of promoters and stakeholders bear the burden of the risk. The liberal approach takes away the healthy discussion at board level and may lead to wrong decisions getting a fair treatment.

Corporate governance is not merely about approaches and styles it is about a thought process of reason where answers are arrived at after  considering both sides of the coin in a fair and transparent manner. The governance cannot be taught in business schools, it can only be learned. The learning takes it time and cannot happen in a day or a month or a year. Mere experience is also not enough to govern is mix if experience knowledge and values. The independent directors need to balance their view in the light of protection of protection of interest of stakeholders vis-à-vis the interest of the company the one-sided approach will bring in unfairness and muddled solution. The fuzziness has to be done away with the approach full of clarity – clarity of thought clarity of reason and clarity of fairness. This approach may be termed as a  approach.

Can this ‘liberalative’ approach be acquired it is a rare combination of rich board experience and knowledge of systems business and regulations. It is gained and earned through classroom environment and exposure to real business situations. The case studies merely help in analyzing a situation based on limited facts. The real-world situation involves more intricacies twined together and more than one solution seems possible or in many situation, solutions seems feasible.

An aspect, which is argued that independent directors must be given a protective environment refers to the immunities that may be afforded to them the discussion now moves on to the aspect of assuring independence. The real independence means independence of mind rather than anything else. Of course if the fear of removal revolves around them then they may not feel comfortable the first and the foremost is to ensure fixed tenure for the independent directors. The latest version of the Indian companies bill exactly attempts to bring in stability in tenure of the independent directors it also recognizes that such a to the tenure of an independent director. The cooling off period ensures that the independent director does on actually become a dependent director.

A connected aspect relates to election of the independent director. In a corporate environment, the promoters, howsoever small their holding may be they rule the roost and no independent director can ever think of getting elected independently without the crutches of support provided by the promoters in other words it is the promoters howsoever, small their holding may be they rule the roost and no independent director can ever thing of getting elected independently without the crutches of support provided by the promoters.

In  other words it is the promoters who more often than not decide as to who will don the mantle of an independent director looking at this no independent director can be assured of his place in the board the selection and election of independent directors has always been a matter of debate amongst corporate governance authors and intellectuals. The corporate environment is considered to offer and follow democratic process.

In a way the selection is generally left to the wisdom of the board or a selection or nominating committee in today’s scenario the selection criteria can be broadly laid down and the independent directors can be drawn from a pool of independent directors certified by authorized institutions the election at  the general meetings can be done excluding the vote of the promoters and their associates, relatives and affiliates. The whole process will encourage creation of a system ensuring independence at every level independence should not only be designed it should be seen to be designed independently.

The core issue today is however not whether the concept of independent  in acceptable or nit but the vital  issue is the degree of independence that is acceptable.  Can an independent director, with all the qualifications and disqualifications, be still really called  an independent director in true sense the promoter controlled or remote controlled companies in true sense the promoter controlled or remote controlled companies elect their independent directors on the basis on the basis of brute majority of the promoters/persons acting in concert.

The independent director acting sincerely as watchdog of the stakeholders may find himself eased out of the board at the time of next retirement by rotation. The promoters desire  independent director acting sincerely as watchdog of the stakeholders may find himself eased out of the Board at the time of next retirement by rotation The promoters desire independent directors to be friendly and support key decisions already taken by them in the so-called Board meetings. In present corporate scenario no independent director can get himself independently elected without the crutches provided by the promoters. The solution lies within remove the crutches and remove the power of crutches provider simply stated let the independent directors be elected at the shareholders meeting by shareholders other than promoters, their relatives and persons acting in concert. Is not a difficult task onus  lies on   law framers to incorporate such safeguards to provide corporate guardians of highest quality to watch the interest of stakeholders.

Should the keepers of interest of stakeholders have business intellect and wisdom?

The answer is straightforward a big on. The independent directors are not there to do business but to keep a vigil to ensure that the activities in the company are fair truthful transparent and reasonable the interest of minority creditors, lenders,  public, customers,  government etc. is being protected through adoption of fair business practices, commonly known as good governance practices.

The independent  director need not be an expert; his conscience  though must be transparent and clear. Independent directors must have independent  thinking , insight and prudence. No  prior  experience of boards is essential for an unshackled person with the freedom of thought will bring fresh ideas and views the persons with ability to think laterally straightaway qualify  to be independent directors  finding such an independent director is no mean task in itself. The concept of independent director is in the process of evolution and by the time the concept ripens, the availability of independent directors shall be by  hordes.

The independent directors having assumed greater significance and importance ought to bear in mind their responsibilities the discharge of these responsibilities must be done with prudence and discretion.  Any failure in rightful discharge of responsibility, if proved must bring some punitive action there cannot be any unfettered freedom; the independent directors enjoy freedom to question, freedom to ask freedom to check and freedom to blow the whistle – these freedoms demand that the independent director must be subject to certain punitive action in case of failure to discharge responsibility reasonably.

The independent director not attending the meetings of the board should be held responsible in case any decision taken in any such meeting severely affects the interest of the stakeholders.

The question of remuneration of independent directors poses another challenge for the law makers and advocates of this concept. Whether the independent directors be remunerated or not and if yes, to what extent? The first question is easier to answer there is consensus amongst the corporate gurus, promoters and law makers that independent directors cannot be expected to take on the responsibility of corporate watchman unless suitably compensated.

Developing criteria for payment of remuneration to independent directors, which does not affect their independence, is certainly a momentous task. There is a view that independent directors should only be paid sitting fee for the meetings attended by them. The task of an independent director is not restricted to meetings only; it extends beyond and compensation in the form of sitting fee only seems to be inadequate. Undoubtedly, independent directors are rendering service but can they be equated with daily wage earners. Determining the compensation amount of independent  directors, as stated earlier, an arduous task.

Their compensation should, however, commensurate with the responsibilities they are shouldering should the independent directors be remunerated out of the funds of the company? The question seems to be odious but is not extraneous. One view is that the independent director squanders his independence the moment he is dependent on the company for compensation.

This logic is not without reason but does an auditor, who gets his remuneration from the company, on longer remains independent. The answer  once again lies within; the independence does not depend on who compensates – what is required is independence of thinking – but who is in a position to determine criteria for remuneration. Any discretion to corporate would severely undermine the independence of the independent directors. Another suggestion has been floated that remuneration should be paid out of investor protection & education fund created under section 205c of the Act.

The proposition is, to say the least, flawed. Any form of government control is neither desirable nor feasible. Let the corporate world be trusted and it is only a matter of time before they realize the benefits associated with this concept. The image, the goodwill and the reputation of any corporate on account of excellence in corporate governance would yield benefits in many ways and once that realization sets in, a day will come when the independent directors would rule the roost.

The independent directors have a task cut out for them and they can excel only if they enhance their skills. The continuous skill enhancement programmes must be made mandatory under the low for the independent directors. The obvious requirement is quality and not quantity. The process of being trained as independent director is a continuous process and bulk of experience is gained’ on the job; skill enhancement is indispensable.

Every effort should be directed towards retaining independence of directors. The moral keepers should decline the position of law makers and the government  have to continuously monitor the practical utility of the provisions relating to independent directors and ought not hesitate to amend or modify the provisions if contrary is observed the law relating to corporate governance of which the concept of independent directors is a part should be dynamic and must change with the change in corporate culture, time and situation.

The concept of independent directors cannot be imposed through laws only; its acceptability has to come from within and the government and chambers of commerce must champion this noble cause to ensure acceptability of this concept not as a façade, but as a reality. The evolution of this concept is on and let it flow like holy river Ganga, changing its course innumerable times but not stopping to flow.

(Ashish Makhija, Corporate Lawyer, Strategist & Trainer, B.Bcom (Hons.), LLB, FCA,FCMA)

(Article published under Quality Times-INDIACSR content sharing Partnership) (Quality Times a Journal of Institute of Directors)
Sourced from: Quality times, Volume.xvii No.10/2012



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