Restrict membership of independent directors for better corporate boards

Feb 5,2014

If Sebi restricts the number of board memberships of independent directors, it will do great service towards correcting an anomaly in most Indian corporate boards. For long, eminence and fame have played an overwhelming role in the selection of independent directors. While eminence is fine, it cannot be a substitute for competence, subject knowledge, board attendance, time spent in preparation and seriousness of participation. Unfortunately, this has been the norm with Indian companies for a long time.

When embarrassing skeletons tumbled out of the closets of corporate America, Indian companies were seized by Schadenfreude.

We should have set our own house in order, but were too busy gloating over the West's misfortunes. Then, the Satyam imbroglio revealed the tip of the iceberg of corporate misgovernance. Eminent boards with illustrious independent directors proved feeble and ineffective against managements' machinations as more Satyams unravelled around us.

Corporate intricacies invariably result in voluminous board agendas and honest participation presupposes extensive preparation. A disingenuous management would be happy to have indifferent and lackadaisical board members. A charismatic CEO supported by consultants or investment bankers can convince independent directors to follow their writ, unless the directors have followed the trajectory of the company.

Asole dissenting voice in a board where everyone else is eager to clear management's decisions is unlikely to make an impact. Reservations are best voiced in a chorus. Independent directors must work in tandem and discuss board matters with each other. Astrong group of independent directors is a check on management, and can ensure proper control over agencies like auditors and lawyers.

People worry that any decision to cap the number of boards, may add to the existing paucity of qualified candidates for independent directors. This scarcity is imagined as many firms do not look beyond retired bureaucrats, judges and lobbyists. The so-called diversity is represented by an over-thehill academic. While representation from retired government functionaries is relevant, modern boards should also have thinkers from other fields such as sociology, ethics, accountancy and consumer behaviour.

Succession is also important. At the CEO level, efficient succession has a better chance if the age gap between the successor and the incumbent is not more than a decade. A board where members are within a decade of each other is more likely to facilitate such transition, relative a board with huge age gaps among its members.

Many companies in the US, Europe and Asia Pacific permit their top management to be on one or sometimes two boards, outside their own organisations. It lets managers learn as they get acquainted with different perspectives in different organisations or sectors. It also increases the available talent pool for independent directors.

This is especially significant because these candidates are in active professional lives. In India, we often see retired professionals serving on so many boards that their post-retirement schedule is more hectic than when they were working. Board membership becomes a profession, where they keep shuttling from one meeting to another, with little time to reflect. This also leads to a lifestyle question: where is the time to spend as seniors?

  Sebi's decision, whatever limit is finally announced, will not lead to an instant reform in the boards of Indian companies. But the right signal will go out. In the early 1980s when sociologists James Wilson and George Kelling introduced their Broken Window Theory, there was derision in certain quarters at the seemingly implausible concept, but Rudy Giuliani as mayor of New York effectively showed that mending street windows, cleaning graffiti and controlling other peccadilloes does substantially control violent crime.

For effective functioning, any board requires an eager, energetic and honest involvement from independent directors. This can only be achieved by limiting the number of memberships to a manageable figure. By articulating its intention on this aspect, Sebi has sent the right signal. This decision must see the light of the day, soon.