National Foundation for Corporate Governance | Roundtable on Independent Directors

National Roundtable on Corporate Governance Norms for Independent Directors in India

National Roundtable on "Corporate Governance Norms for Independent Directors in India" was organised by National Foundation for Corporate Governance (NFCG) on 26^th March 2007 in The Taj Mahal Palace & Tower at Mumbai, to examine and discuss the report a draft report - 'Independence Principles for Corporate Boards and Directors', formulated under the authorship of Dr. N Balasubramanian, (Prof. IIM Bangalore & Chairman Centre for Corporate Governance & Citizenship, IIMB), Mr Nawshir Mirza (Professional Independent Director) and Mr Ram Savoor (Non Executive Independent Chairman, Foseco India).

The Roundtable was chaired by Mr. Nimesh Kampani, Chairman, JM Financial Ltd. and had around 37 participants from Industry.

The Roundtable commenced with welcome note by Mr. Chandrajit Banerjee, Executive Director, NFCG and Senior Director, Confederation of Indian Industry. Mr. Banerjee made a presentation on Corporate Governance Initiatives and National Foundation for Corporate Governance. He highlighted that Corporate Governance in India was not triggered off by any nationwide collapse or banking collapse rather it was came out proactively and that too initially driven by an independent industry apex organisation. He emphasized the role played by Kumar Mangalam Birla Committee Report, 2000; Naresh Chandra Committee Report; TCA; Narayana Murthy Committee; Dr. Irani's Committee in suggesting changes in the Company Law. On National Foundation for Corporate Governance, he highlighted about NFCG's formation, vision, structure, National Centres Corporate Governance, areas of financial grant and Core Groups. Mr. Banerjee further elaborated on NFCG's initiatives, aliening these with its mission.

In his opening remarks, Mr. Nimesh Kampani stated that Corporate Governance encompasses the whole of the series of Act. He emphasizes on how the corporate is to govern itself and the need to protect the interest of all stakeholders. Thus, as per him the Corporate Governance is indirectly a trusteeship principle. While stating that Directors undisputedly has a huge responsibility, he pointed out that on the real role of independent directors is how do they challenge the management and this can be achieved by the independent directors by drawing stress on untouched issues to the management before conveying acceptance on the matter and thereby putting challenge of the management and Board to come back in the next meeting and do the needful in the matter.

Appreciating the draft report on Independent Directors prepared by Dr N Balasubramanian and others, Mr. Kampani compared it to be a set of principles that would strengthen corporate morale DNA in establishing standards of behaviour that makes ethical aspiration a reality. Emphasising the real advantage of good Corporate Governance, Mr. Kampani stated that the company, which are governed well, triggers a bigger market capitalization from investors. In comparing between the need for Independent Director or Independent Board, he opinioned that the need for Independent Board is more important, as whole Board, if think as Independent directors without conflict of interest will increase substantially the wealth of shareholders and Investors

Dr. N Balasubramanian, Prof. IIM Bangalore, Chairman Centre for Corporate Governance & Citizen IIMB and Chairman NFCG's Core Group on Corporate Governance Norms for Independent Director, underlined that the draft report is a combined effort of other Core Group members - Mr. Nawshir Mira and Mr. Ram Savoor and the reports is in nature of general principles and is not mandatory code to be followed by the Corporates. Thereafter, Dr. Balasubramanian made a detailed presentation on the draft report.

Observations on the draft report was made by expert panel comprise - Mr. M K Sharma, Vice Chairman, Hindustan Lever Ltd., Mr. Ravi Narain, Managing Director & CEO, National Stock Exchange of India, Mr. Rajendra P Chitale, Managing Partner, M P Chitale & Associates and Mr. Parag Basu, Deputy General Manager, SEBI.

The main Observations:

1. Mr. M K Sharma, Vice Chairman, Hindustan Lever Ltd:

To much emphasis on independent Directors should not result into conversion of Promoter Directors and Executive Directors into a class of second-class citizens or scheduled caste or scheduled tribes

The responsibility and accountability should go hand in hand. As, the officer in default, the primary responsible person is the Executive Director, whereas, the Independent Directors, Non-Executive Directors fall in the second tier and the third tier.

Recommendation in the report on affirmative vote by a majority of Independent Directors (i.e. giving veto power to the independent directors) on resolution pertaining to certain statutory specified matter of importance, is somewhat going to far.

All the directors be they Executive or Independent or Promoter (not restricting to Independent Directors) should have the freedom to seek independent legal advice.

It is not the quantity of Independent Directors but the quality of Independent Directors that make difference.

The quantum of independent on the board must have some broad nexus with the level of concentration of equity.

The concept of lead Director is welcome. However, compensation committee must contain Executive Directors

Promoters should not participate in preferential allotment because they would be in the conflict of interest situation. But on the issue of merger and amalgamation or discontinuation of business or divestment of business, the collective responsibility of the board itself should be there and not limited to Independent Directors.

2. Mr. Ravi Narain, Managing Director & CEO, NSE

Need to push Incentivisation system forward rather than continue to engage with fine tuning the principles
To encourage Independent Directors to bring agenda items for discussion which is not a routine items
Emphasis on power of Institutional Shareholders, whose voices heard as far as corporate governance is concern

3. Mr Rajinder P Chitale, Managing Partner, M P Chitale & Associates

Independent directors assume activist role, could have ramifications which would be different but it may not necessarily be constructive.
The veto power given to the Independent Directors should instead go back to shareholders rather than be with Independent Directors. Similar many other issues referred in the report need to go back to the shareholders as special resolution.
The views of the Independent Directors on a particular resolution could be made subject matter of the explanatory statement rather than empowering them independently in terms of being able to exercise veto.
To move towards the Incentivise debate
The report must touch the issue of whether the chairman should be purely independent of the CEO or they should be an Independent Director

4. Mr. Parag Basu, Deputy General Manager, SEBI.

Inside the report in some of the language it creates impression that it is to be mandatory followed by some of the users.
Through Clause 49 of the Listing Agreement, SEBI has tried to do give a broad framework of the various modalities of corporate governance and laid out various norms but SEBI does not go into micro management of any particular aspect.
The recommendation in the report of Infrastructure being laid out for Independent Directors is welcome.
Regarding to the point on qualification of independent directors, SEBI has stated in its proposal the age of an independent director should be at least 21 years.
With regard to the recommendation on the affirmative vote of majority of Independent Director and other points like Chairman of board being Independent Director, practical applicability must be considered

Discussion Session
The discussion session was chaired by Mr. Nimesh Kampani. Some of the main observations raised by the participants on the report and the comments of the expert panel, were as following:-

If one wants to bring a true professionalism in board composition can we have a process of succession of independent directors on the board over a period of time? How succession is being done and how the independent directors are getting invited, is a very critical issue.
Is there any possibility of rating of company's board? I am not saying there is a formal rating can be done. Maybe organizations could start rating the board and publish every year as to how the boards function over a period of time in creating wealth for the shareholders.
Regarding institutional shareholders, how do they behave themselves and what do they do is important. They are influencing from outside the board of those banks and independent directors of those banks. In the next 3-5 years time the institutional shareholders will start exerting themselves and creating influence on the independent directors or on the management on what they do and what they feel.
The situation of weak CEO and weak board, or a strong CEO and a weak board lead Companies to be sick and far from growth. To empower independent director the need is not to marginalize the whole time director for the promoter management. The empowerment is designed to facilitate boards independence and contribute to the process of decision making mostly on a consensual basis.
What are the internal barriers at the board level and the external barriers as imposed by various legal rules or legislation? How could we overcome the barriers? For example, for recruitment, selection, training and development that you have mentioned, we do not have an agency in India for undertaking this kind of activities.
What do we do about the Annual General Meetings and the shareholder activism? There is not much debate on that too, we are afraid. But this type of platform we are sure, given the vast range of expertise and experience around the table would help us deliberate on some of these issues.
Can we introduce the question of peer review of directors and also the performance related compensation.
There should be review of independent director's performance by the whole of the board. How the process will be taken up is the matter of debate.
With a reference to the age of the directors, according to Indian companies Act, a minor can become a director because age is not prescribed. In several companies minors are appointed as directors. According to Indian contract Act a minor can become an agent.
For shareholders meeting of the Company, it prescribed 21 days as length of notice but for directors meeting no length of notice is prescribed.
When independence comes within? it is on the strength of the individual competence. Competence aspect has not been taken into account in the third part at all.
The very important function today is the reliability of financial reporting and risk management and may be compliance with laws and regulations. The relation between CFO and the chief internal auditor need to be brought in.
Can we have some sort of peer review, some kind of criteria which is a priority decided and offer particular period. There should be some kind of an evaluation.

Appreciating observations of the participation, Mr. Nawshir Mirza and Prof. Balasubramianan, gave their comments to it.

The meeting conclude with emphasis that professional Directors (i.e. Independent Directors) must make maximum contribution to the deliberation of the board and helping the board.

Benefit to the Core Group on Corporate Governance Norms for Independent Directors

The Roundtable was immense successful in achieving its objectives of getting views, suggestions and observations from eminent persons from Industry. These view and observations will be debated and considered by the core group before finalsing their report.

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