Role of Independent board directors in Indian companies

The probe into Satyam scam is finally over.  SEBI has barred Satyam Computer’s founder B Ramalinga Raju and four others from markets for 14 years and asked them to return Rs 1,849 crore worth of unlawful gains with interest.

Following the takeover of scam-hit firm Satyam by Tech Mahindra in 2010, Mahindras were contemplating to sue the company’s erstwhile independent directors to recover Rs 11 million paid as commission to non-executive directors during the financial year 2008-09. Each of Satyam’s former independent directors were paid a commission of Rs 12 lakh over and above sitting fees for the financial year 2008-09.

The Independent Directors of Satyam included renowned people like management guru Krishna G Palepu, Pentium chip innovator Vinod Dham, former Indian School of Business dean Prof Mendu Rammohan Rao, former cabinet secretary TR Prasad, former IIT Delhi director V S Raju and US-based academician Mangalam Srinivasan. It is ironical to note that in the presence of such eminent independent directors, the company’s founder Ramalinga Raju could manage to fudge the company’s accounts for several years.

Thus Satyam scam brought into question the role of the board, independence of the so called Independent Directors and the equation that they share with the company’s management and other stakeholders.

A look into the corporate environment prevailing in a country helps in understanding the influence of the board on corporate decision making and also the constraints that might limit the role of the Independent Directors. The corporate board structure and role of directors in different countries vary depending upon the corporate governance systems, legal set up, social and cultural values, and the structure of capital markets.

Developed nations like the US and UK have a shareholder-centric model of corporate governance that is created based on common law. In the Anglo Saxon model, a unitary board of executive and non executive directors serves as the controlling mechanism to ensure that management act in the interest of shareholders of publicly traded corporations and pass on the profits to them. The corporate environment in India is very similar to that in the UK, having been built from the legal foundations and legacies of the UK. India is pre-eminently a common law country with a well developed system of law and justice. Similar to the UK and the US, the Indian regulations focus on the role of the board as the bridge between owners and management.

The difference, however lies in the presence of concentrated and controlling shareholders in India. In India, family run companies continue to dominate the corporate landscape. In most family controlled businesses, the owners are also the controlling shareholders, who retain the  managerial control of the business and have the power to influence or control the corporate decisions and dominate other shareholders.

To moderate the influence of dominant shareholders, Clause 49 of SEBI requires that at least half of the board directors should be independent in companies where chairman is an executive and one third of the board directors should be independent in companies where chairman is a non- executive. Why is it that in spite of the presence of Independent Directors, the Satyam boards of directors acted as silent spectators and were largely ineffective in monitoring the actions of management?

To an extent, this behaviour can be attributed to the process through which the directors come on the board. The directors are generally brought in by the promoters and management; therefore they could look upon themselves as having responsibility to the promoters rather than to the outside shareholders. As a result, the boards of directors may remain passive or largely function as mouth- speak of the management.

The interests of the promoters, who are the majority shareholders, need not coincide with those of the other minority shareholders. This can lead to expropriation of minority shareholder value through actions like “tunneling” of corporate gains or funds to other corporate entities within the group. Under such circumstances, the directors who are friends and allies of the promoters may opt to confess incompetence and ignorance rather than to disturb the family based governance structures of Indian companies. When Dr Rao, the dean of the prestigious BSchool resigned from Satyam board, he was reported to have acknowledged of having no prior knowledge of the scam and was said to be stunned by the revelations of Ramalinga Raju.

Such instances of failure in corporate governance highlighted the need for more changes to the existing systems. The definition of Independent Directors that was missing from Companies Act 1956, has been incorporated in new companies Act 2013, along with the manner of selection, terms of appointment, responsibilities and liabilities.

While the Act, 2013 empowers the Independent Directors to have a definite ‘say’ in the management of a company, but at the same time the Act also places greater accountability upon them. The concept is definitely a step towards strengthening corporate governance in India, but the extent to which Independent Directors will be truly independent post this Act is yet to be seen.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s