MUMBAI, ET Bureau | Sep 06, 2016
Demand for independent directors is at a high fuelled by the New Companies Act and rules brought up the market regulator, and being the chairman's friend isn't anymore the most important qualification to get a call to fill up that position. Companies are increasingly looking to induct on board people who can add value to decision-making.
Estimates by firms that conduct board-level searches, such as Egon Zehnder, Korn Ferry and RGF Executive Search, suggest a 20-25% increase in demand for independent directors in the past six months.
"As of last March, a lot of people had to step down from boards because of the new Companies Act and Sebi regulation that limits the number of board seats you can have," said Sunit Mehra, managing partner at executive search firm Hunt Partners. "This wave of demand will continue for a year as there are a lot of gaps due to positions becoming vacant that need to be filled."
Under the 2014 Securities and Exchange Board of India guidelines, an independent director's term is capped at five years, after which a special resolution by the company is required for the reappointment, which too can stretch to five years. After the two terms, there will be a cooling-off period of three years if the person wants to return to the board.
The New Companies Act allows a person to be on the board of 10 companies while Sebi has limited this to seven listed companies (three if serving as a whole-time director). So effectively, a person can be an independent director of seven listed companies and three unlisted ones. Many people were on the boards of more companies and they had to step down from some of the firms to conform to the rules.
Among the listed companies that have appointed independent directors this fiscal year are Wipro, Larsen & Toubro, DCM, Sanofi India, Hexaware Technologies, Grasim Industries, Bajaj Electricals, ITC and Lanco Infratech, according to data from PrimeDatabase.
There are a host of other companies in information technology, consumer goods, automobile, infrastructure, manufacturing and telecom that are looking for new professionals at the board level, search experts said.
"We have picked up more board members in the last four months than we did in eight-nine months of last fiscal (year). There are new board positions being created as companies become more aware of risk compliance, governance, etc," said Navnit Singh, chairman of India for Korn/Ferry International, a leading executive search consultant.
There is also an increasing realisation that investors are looking at companies with better corporate governance, and independent directors are expected to be the watchdogs to ensure good practices by the boards. This is driving companies to bring in people with impeccable records. "There is a corporate governance premium that is emerging or, in other words, companies with better corporate governance enjoy better prices in the stock market," said Arun Duggal, chairman of local ratings firm ICRA and an experienced independent director.
Earlier independent directors used to be people who the promoters knew, but now companies are hiring search consultants to look for directors just like the way they do for any other appointments.
"There has been a movement towards (inducting) independent directors as companies are seeing the value of independent directors being more objective, and there is a serious capability matching. Earlier, it would be restricted to a select pool of people the board and the chairman knew," said Govind Iyer, consultant at Egon Zehnder India.
Companies are also looking at more international directors than before. As many businesses are moving global now, there is need for global expertise on board, he added.
Naina Lal Kidwai, former chairperson of HSBC India and an experienced independent director, earlier told ET that the searches were breaking beyond the old boys' network and becoming more professional.
The shift is also in the competency skills that companies are looking for in board members. These are no longer restricted to the mandatory regulatory requirements — they want people who can contribute towards the strategic growth of companies. Independent directors now have to be from a specialised area in economic environment, bring in high levels of business and strategic skills, contribute in brainstorming and provide impetus to business of the company in specialised functional areas
"Background in global finance is an important dimension emerging now for board member requirements," said R Suresh, managing director of RGF Executive Search. "Companies are looking for people who are strategic and can be adviser to the CEO. There is also a great demand for people with M&A, private equity, investment banking and corporate strategy experience."
A large part of the spurt in demand for independent directors this year is driven also by foreign companies that are privately held in India. These are European, American and Japanese companies who do not have mandatory board member requirements, but are getting people on board who can advise them on the Indian market, said Suresh.
RGF Executive Search is searching for five independent directors for companies with $2-3 billion market cap, he said.
Because of the greater awareness among companies about corporate governance, they are now open to proactive suggestions from search experts if they come up with a suitable candidate even when there is no vacancy. "I just showcased a highquality Indian talent to three large Indian companies ... who were not proactively looking out for people, and all three were interested," said Suresh.