I am happy to note that the JJ Irani Committee has recommended that one-third of a listed company's board should be made up of independent directors (half, if there is an executive chairman).
Sebi's listing requirement, as per the revised Clause 49, will be for half a company's board to consist of independent directors.
Well before it became a legal or listing requirement in our country, the Confederation of Indian Industry in 1998 developed a code for good corporate governance.
I happened to chair that task force. The corporate governance code recommended by the Kumarmangalam Birla Committee to Sebi, which became a listing requirement from 2001, has much in common with the CII code.
To me the core of good corporate governance is to increase shareholder value with transparency, adequate disclosure and accountability.
Not many are aware that the Indian corporate governance code is much tighter than those in most of the world, including Europe, Japan and South Korea.
Even today, in Europe there is no requirement of disclosure of quarterly results, something we have had since 2000.
In today's competitive world, high quality advice, sound judgment and an outside point of view are essential at the board level.
So, even if there were to be no legal requirement of having independent directors, I for one would invite them on my board, as we have been doing at Bajaj Auto for over four decades.
We had the privilege of having the late S L Kirloskar on our board. And, he was as independent as they come.
Why is the world clamouring for independent directors? Because events at Enron, WorldCom, Tyco and now even AIG have cast doubt on the integrity of managements.
Independent directors are therefore also seen as a check on managements, as an oversight mechanism, apart from the value addition that they bring to board deliberations.
I believe we need to consider some aspects of the issue before we come to a conclusion about the need and effectiveness of independent directors in India.
There is a very significant difference between Indian managements, and managements in the US and the rest of the developed world.
This is that more than 75 per cent of large listed Indian companies are family-owned, in which a family has a significant (30 per cent upwards) shareholding in the company.
The balance too is largely public sector units or subsidiaries of multinational companies. Companies where the management has little or no stake in the company constitute less than 5 per cent of the large listed companies.
In a company managed by "owners", there is a very strong motivation for managements to work for a long-term share price increase, i.e. long-term earnings increase, because the family's prosperity and reputation ride on the prosperity and ethical dealings of the company.
In a competitive market situation, the real controls on management come from the marketplace. Managements (that is promoters) can't be unfair to any shareholder, including the small shareholder, and expect to go unpunished.
Now, this may not tie up with the image and may be the reality of some Indian managements. If there is a popular image, it is of taking undue benefits from the company.
But is that something independent directors can successfully deal with? I have my doubts. Such acts are illegal acts, which need to be dealt with under the Indian Penal Code or the Companies Act.
The whole effort of aligning management interests with shareholder interests, which drives the corporate governance debate in the US, is thus not as relevant in our country.
The interests of the management and shareholders in India are congruent because the management is or represents promoters, who are a large shareholder with most of their wealth tied to the value of its shares in the company.
Also, and this is very important, with "controlling" shareholding by the promoter, who in actual practice appoints directors, independent or others, how truly "independent" can most independent directors be?
At Bajaj Auto, we are privileged in having outstanding independent directors, but in large companies the privilege of being on the board and the ever-increasing compensation (which is necessary) create a situation, which is not very conducive for many directors to maintain their independence.
This is why in the US, for listing on the New York Stock Exchange or Nasdaq, companies in which a group has a controlling interest of over 50 per cent are statutorily not required to have any, I repeat any, independent directors.
I find the lack of mention of this fact in the outpouring of verbiage on this issue in our country quite amazing.
I think in our penchant for political correctness and following western fads, we are disregarding the fundamental fact that it is the whole-time directors and promoters who are primarily responsible for the successful running of a company. They should have the authority and freedom to function.
Independent directors do not have enough information about the business and the company, or the time to perform their assigned role.
This has nothing to do with their capabilities. Managing a large company is a full-time job. Giving them this role beyond a limit will achieve very little.
Jay Lorsch, a professor at Harvard, writing in the Financial Times (May 27, 2005), concludes that "well intentioned (independent) directors find that they have insufficient time and knowledge to perform their jobs well".
But we in India seem to prefer form over substance, structure over process. We want to be seen as doing something to solve a problem. Whether the problem gets solved or not is something that is not a major concern.
To my mind the quality of independent directors is much more important than their quantity. A single S L Kirloskar can perform the responsibilities of independent directors much better than half a board of definitional "independent directors".
To conclude, I support the Irani Committee for requiring that a third of a listed company's board consist of independent directors.
I think it strikes an appropriate balance between the need for expert and objective advice and shareholders' need for oversight over managements, on the one hand, and managements' need for a free hand to take quick decisions, on the other.
