Professionals as directors vs professional directors
August, 17th 2006
Directorships for a living may sound alluring. But that is not healthy for corporate governance, feels Mr M. Damodaran, Chairman of the Securities Exchange Board of India (SEBI).
When speaking at meeting organised by National Law School of India University and the National Foundation for Corporate Governance, a few days ago, Mr Damodaran
urged companies to refrain from appointing non-shareholder directors;
emphasised the need for a proper evaluation process to rate the performance of the board members;
decried the filling of board slots with those who make it a profession of becoming directors; and
supported the idea of only professionals being appointed as directors.
Significant statements, these are, coming as they do from the market regulator. How are the professions of chartered accountancy and company secretaryship reacting to these? Here are a few comments from professionals in the field.
Who is a professional?
"True, directors who were members of the board for a number of years before `corporate governance' came into force may be currently continuing as independent directors," says Mr N. R. Moorthy, a Pune-based company secretary, concurring with the views of the SEBI chief. "It is true their contributions to the board may not be valuable. Yet, their loyalty is unquestionable."
On the need for professionals on the board, Mr Moorthy is of the view that finding people of the right type and the relevant discipline is not easy. "For instance, a software park company requires a software technocrat to effectively contribute to the business. Such technocrats are rare to get. So too, the pharmaceutical industry may find it tough to find a suitable scientist. Locating proper candidates who have to carry out onerous duties as directors is a Herculean task. Nor can it be assumed that all professionals will have the time to devote to extra professional work."
To complicate matters, the word `professional' has not been defined, says Mr Moorthy. "The concept of corporate governance is nascent in India. It will take considerable time before the concept can find its utility."
Inconclusive search for independence
Six decades may be a considerable time. That was how long ago we won our Independence, but we still struggle to identify independent directors, rues Dr Sanjiv Agarwal, a Jaipur-based chartered accountant. "On independent directors, there is a lot of debate going on as to: Who can be an independent director; is there at all a need for independent directors, as they don't have anything at stake; how many independent directors are needed; should they be rotated or should their term be fixed; what should be the criteria for selection of independent directors; should any compensation be paid to independent directors; what consideration would not distort their independence; should they hold some qualification shares in companies they are appointed in; what sort of relationship should exist between executive and independent directors; how can their performance be evaluated and so on." Unfortunately, there are no clear answers to these concerns.
"While independence cannot be defined or measured, having the same person as a so-called independent or professional director for many years does not seem logical," says Dr Agarwal. "Too much familiarity can breed compromise and complacency; and even the best people could lose value over the period. Independence may not be expected from permanent directors though exceptions may exist. World over, it is also a fact that it is difficult to find truly independent directors who participate in the board meetings with an independent mindset and at the same time contribute effectively."
According to Dr Agarwal, fearless participation is possible only when one is not dependent on the appointing directors or the management, for compensation and appointment/reappointment. "We need to strike a balance between compensation and contribution; if the compensation is not adequate, effective and desirable board level people will not come forward, and then it would also be unfair to expect performance from them."
Independence is a state of mind and highly subjective, and a professional can be a true corporate guardian if he acts as an independent person in whatever role he plays, states Dr Agarwal. "While the regulators and the legislature should lay down the broad framework for the implementation of the corporate governance, its application should be left to the corporate and professionals with a scope for intervention, if called for."
Contribution vs professional qualification
The president of the Institute of Company Secretaries of India (ICSI), Mr H. M. Choraria, says that the word professional refers to somebody with expertise in one field, say, law, taxation, accounting, or taxation. He concedes, however, that without such specialised qualification too, one can contribute to the company, make a difference to decisions, bring objectivity to discussions, be independent in views, and act without fear.
On shareholding, though, Mr Choraria wonders if holding one share would make any difference. "Ultimately, shareholders decide who the directors are," says Mr Choraria. "It will take time for the composition of the board to align with the long term sustainability of the company." Or, in other words, each company perhaps gets it right with the board mix, over time.
What are the ICSI prez's views on evaluating the performance of directors? "Nothing is in place about performance appraisal of directors. Collective contribution can be measured. Not individual." A simple form of evaluation is provided for by shareholder democracy, says Mr Choraria. "Members can interact with the directors at the AGM."
Gaps in the law
Mr N. R. Sridharan, formerly with the Department of Company Affairs and currently a Chennai-based chartered accountant, draws our attention to the fact that there are no provisions in the Companies Act to compel directors to hold shares in a company unless expressly thus provided for in the Articles. "How can we prove that a director is not contributing?" asks Mr Sridharan. "After all, they are party to the board's decisions, as representatives of non-promoter shareholders." He is against making the exception as a rule. "The law has provisions about retirement of directors. Clause 49 doesn't contemplate shareholding by independent directors," says Mr Sridharan.
A theoretical pursuit?
Dr S. Kannan, also a Chennai-based chartered accountant, has a similar view. "Companies can decide share qualification for directors," he says. "Let us not forget that there can be a conflict of interest with an increase in shares beyond a point." Assessing contribution of directors is difficult; and we may get so mired in the definition of performance, that the entire exercise would become theoretical, cautions Dr Kannan.
"We may first need metrics for whole-time directors," he argues. "An analysis of the gaps between promises made by promoters in prospectuses, and the results achieved by them can be useful," suggests Dr Kannan. "SEBI should lay the policy framework for transparency, accountability and corporate governance, rather than get into specifics and micromanaging."
Chairman of the Corporate Laws Committee of the Institute of Chartered Accountants of India, Mr S. Santana Krishnan says that company law provides a system for the appointment of directors. "If there are specific instances where the system has not been followed, they must be viewed as exceptions and not as a rule. The regulator has adequate powers to deal with such instances," writes Mr Santana Krishnan. "The RBI's policy of evaluating directors is good and a time tested one. In my opinion, this should be followed for all appointments," he says.
"Nothing reinforces a professional relationship more than enjoying success with someone," says Harold Ramis, an American actor. A test that may work with companies and directors too, as long as that `someone' stands for shareholders.