India CSR Network
No Result
View All Result
  • Login
  • Register
SUBSCRIBE
  • Home
  • CSR
    • Art & Culture
    • CSR Leaders
    • Child Rights
    • Culture
    • Environment
    • Education
    • Gender Equality
    • Health
    • Skill Development
    • No Poverty
    • Safety
    • Covid-19
    • Safe Food For All
  • Sustainability
    • Sustainability Dialogues
    • Sustainability Knowledge Series
    • Plastics
    • Sustainable Development Goals
    • Circular Economy
    • BRSR
  • Corporate Governance
    • Diversity & Inclusion
  • Articles
  • Interviews
  • Events
  • BOOKS
  • More
    • Technology
    • Lifestyle
    • Case Studies
    • Knowledge
    • Social Sector Leaders
    • Social Entrepreneurship
    • Philanthropy
    • Sports
    • Gaming
  • Prime
  • Home
  • CSR
    • Art & Culture
    • CSR Leaders
    • Child Rights
    • Culture
    • Environment
    • Education
    • Gender Equality
    • Health
    • Skill Development
    • No Poverty
    • Safety
    • Covid-19
    • Safe Food For All
  • Sustainability
    • Sustainability Dialogues
    • Sustainability Knowledge Series
    • Plastics
    • Sustainable Development Goals
    • Circular Economy
    • BRSR
  • Corporate Governance
    • Diversity & Inclusion
  • Articles
  • Interviews
  • Events
  • BOOKS
  • More
    • Technology
    • Lifestyle
    • Case Studies
    • Knowledge
    • Social Sector Leaders
    • Social Entrepreneurship
    • Philanthropy
    • Sports
    • Gaming
  • Prime
  • Login
  • Register
No Result
View All Result
India CSR Network
No Result
View All Result
Home More

The drop in the number of independent directors in boardrooms bodes ill for corporate governance

by India CSR Network
11 years ago
in More

By Rajesh Chakrabarti, Professor, Indian School of Business

Quality independent directors are hard to find today. Ask Azim Premji. India’s third-largest IT company, Wipro, is about to join the horde of companies violating Sebi norms by keeping independent directors beyond the suggested nine-year maximum tenure.

The independent director situation in India has indeed become tighter in the last two-and-a-half years since the Satyam scandal shook India Inc. While the Satyam crisis did not bring any regulatory changes in its wake, research seems to indicate that, combined with the near-concurrent persecution of Nimesh Kampani, the episode has left a significant imprint in corporate boardrooms across the country.

In a recent paper*, we compare the composition, characteristics and compensation of boards before and after the crisis for close to 2,500 firms to study the broader impact of the event on corporate boards in India. The findings are quite illuminating. Boards have become larger but controlling for other things, less independent (have fewer independent directors) after the crisis. Much of this seems to be the result of a “supply shock” in which independent directors have become more aware of the risks associated with board positions. In the three weeks of January 2009 after the Satyam fraud came to light, independent director exits soared to 109 from a monthly average of about 30 before the crisis. Over a longer horizon, independent director exits per year have risen by 20% in the post-Satyam period as compared to the three years before the crisis.

The paucity of independent directors is reflected in the pay as well. The average pay of independent directors in the post-Satyam period has shown an increase of over 30%. Also the proportion of fixed pay has increased in their compensation packages. But even the pay rise does not seem to have been able to attract quality to board rooms. Independent directors are now less likely than before to be professionals (including lawyers/consultants, financial experts, and retired executives, civil servants and government officials). Also, notwithstanding the quality drop, independent directors have become busier, sitting on more boards than before.

As a reaction, many companies have now turned to executive directors. Executive director appointments have more than doubled in the post-Satyam period than before. Their proportion on boards has risen by 16%. This does not automatically follow from fewer independent directors, there are some directors who are neither. Non-executive chairmen have become more common – a move that brings down the minimum independent director proportion from half to a third. Among other things that have changed, board committees became more punctual and meetings are being better attended than before.

What to make of all these changes? They can all be seen as results of the crisis affecting a more or less efficient market for independent directors. As the media and investigative agencies hounded the directors, a virtual exodus of independent director resignations followed immediately. The independent directors reassessed the risks of a board seat – that a lifetime’s reputation can be tarnished because of the hard-to-detect actions of an unscrupulous promoter.

As a result, the existing and potential independent directors demanded a higher price for their presence in the boards. Realising the extent of the risks, they also want more certainty in compensation. At the same time, to the extent that it matters, they want to monitor the promoters for their own safety. Hence, attendance in meetings has gone up.

But not all independent directors are the same. The ones with the most reputation to protect simply exited the market bringing a drop in quality. More firms are now left vying for a smaller pool of independent directors, raising the number of directorships per head.

CSRBooks.com CSRBooks.com CSRBooks.com

But there is probably more to it than just a drop in supply of independent directors because of the now-more-obvious risks. India Inc itself may have started doubting the efficacy of independent directors in the boardroom. Firms are now opting for a non-executive chairman, which reduces the independence requirement and packing boards with more executives. That signifies a paradigm shift about the value of the much bandied about board independence. India Inc may have very well just started walking away from the idea, something it was anyway never too comfortable with. And the move is not wholly without logic. In a recent paper, Raghuram Rajan and his co-authors have argued that internal governance may well provide a viable alternative to the present system. Indian businesses may well agree.

The issues involved also assume particular importance as the government mulls over the new Companies Act. The Indian legal system currently draws no distinction between the responsibilities of independent directors and those of the “inside” directors. More importantly, all directors have an indefinable fiduciary liability that extends to any offence the company may commit, like issuing a cheque that bounces or allowing delays in employee provident fund payments. The independent director has virtually no control over such actions and yet is responsible to an equal degree with other board members for such offences. Therefore, one not only risks a lifetime’s reputation by serving on a board, even one’s liberty and property.

(Co-authored with Krishnamurthy Subramanian, who teaches finance at the Indian School of Business, Hyderabad)

*Chakrabarti, Rajesh, Krishnamurthy Subramanian and Naresh Kotrike, After the Storm: The Unregulated Effect of a Corporate Governance Crisis on Corporate Boards, Working Paper, ISB

Professor Rajesh Chakrabarti is an Assistant Professor of Finance at the Indian School of Business. Prior to joining the ISB, he was with Georgia Tech College of Management. He received his PhD from the University of California at Los Angeles. He also has an MBA from the Indian Institute of Management, Ahmedabad, India and a bachelor’s degree in Economics from the University of Calcutta, India. Before joining Georgia Tech, he had taught at the University of Alberta, Canada and had previously worked for a major financial institution in India. Professor Chakrabarti’s areas of teaching and research interests include international financial markets, exchange rate movements and informational issues in financial markets. His research papers have been published in the Journal of Financial Economics and the Journal of Financial Markets.

(Economic Times)

ShareTweetPin

India CSR Network

India CSR is the largest tech-led platform for information on CSR and sustainability in India offering diverse content across multisectoral issues. It covers Sustainable Development, Corporate Social Responsibility (CSR), Sustainability, and related issues in India. Founded in 2009, the organisation aspires to become a globally admired media that offers valuable information to its readers through responsible reporting. To enjoy the premium content, we invite you to subscribe it.

Related Posts

Union Budget 2022: Tax Rebates in Budget for Realty Vital for Salaried Class
More

Union Budget 2022: Tax Rebates in Budget for Realty Vital for Salaried Class

January 19, 2022
India’s Veteran journalist Vinod Dua passes away
More

India’s Veteran journalist Vinod Dua passes away

December 5, 2021
Meet a NGO Leader who digs up dirt to set right system
More

Meet a NGO Leader who digs up dirt to set right system

August 10, 2021
More

Republic or Democratic?

January 22, 2021
Brand Identity of India CSR Network
CSR

Nomination invited for India CSR Professional of the Year Awards

August 4, 2021
More

Value of Books in Life

August 4, 2021
More

Google generates its 83% of revenues from the display of ads

August 4, 2021
More

Reliance Foundation Hospital rewarding medical staff with extra pay

August 4, 2021
CSR

Covid-19: ITC’s Paperboards and Specialty Paper Business lend its support to the needy in Telangana

August 4, 2021

Discussion about this post

Popular Stories

  • Lupin Terminates 300 Staff

    Lupin Terminates 300 Staff

    0 shares
    Share 0 Tweet 0
  • What is liberalization?

    0 shares
    Share 0 Tweet 0
  • 7 Reasons Why Smartphone Can Make Your Life Easier

    0 shares
    Share 0 Tweet 0
  • QNET CSR Arm Supports Electrification Project to light up the lives of 470 villagers in Meghalaya

    0 shares
    Share 0 Tweet 0
  • MCA amends Schedule III of Companies Act on disclosure norms in financial statements and Details of Corporate Social Responsibility (CSR)

    0 shares
    Share 0 Tweet 0
India CSR Network

  • Home
  • About Us
  • Team
  • Partnership
  • Contact
  • Terms of Use
  • Subscribe

No Result
View All Result
  • Home
  • CSR
    • Art & Culture
    • CSR Leaders
    • Child Rights
    • Culture
    • Environment
    • Education
    • Gender Equality
    • Health
    • Skill Development
    • No Poverty
    • Safety
    • Covid-19
    • Safe Food For All
  • Sustainability
    • Sustainability Dialogues
    • Sustainability Knowledge Series
    • Plastics
    • Sustainable Development Goals
    • Circular Economy
    • BRSR
  • Corporate Governance
    • Diversity & Inclusion
  • Articles
  • Interviews
  • Events
  • BOOKS
  • More
    • Technology
    • Lifestyle
    • Case Studies
    • Knowledge
    • Social Sector Leaders
    • Social Entrepreneurship
    • Philanthropy
    • Sports
    • Gaming
  • Prime
  • Login
  • Sign Up
  • Cart

Welcome Back!

Sign In with Facebook
Sign In with Google
Sign In with Linked In
OR

Login to your account below

Forgotten Password? Sign Up

Create New Account!

Sign Up with Facebook
Sign Up with Google
Sign Up with Linked In
OR

Fill the forms below to register

All fields are required. Log In

Retrieve your password

Please enter your username or email address to reset your password.

Log In