Independent unattached directors Rolling stones that will gather moss?
September, 21st 2006
If SEBI and the stock exchanges expect the independent director to be their man in the company, vigilant of all infractions of, or deviations from, the law, it is unrealistic.
In contrast to the opinion that the managing director must be required to have a significant stake in the company, since a sense of belonging or ownership may spur him in his efforts to enhance the profitability of his company, an independent director who belongs to a special class or caste or breed, as defined in Clause 49(1)(A)(iii) of the Listing Agreement between a public limited company and a recognised stock exchange (on which the securities of that company are permitted to be traded), cannot have any `substantial' interest in the voting shares of the company.
For this purpose, a `substantial' shareholder of the company is taken to mean owner of 2 per cent or more of its voting shares. It remains to be seen whether an independent director, without stakes, will be action-oriented or his role will be confined to a critical appraisal of what his colleagues in the board do, or fail to perform through haste, waste, inertia, duplicity, etc.
Constraints, one too many
It is noteworthy that the Listing Agreement leaves no one in doubt that not less than 50 per cent of the board of directors of a listed company shall have to be non-executive and that only such a director is eligible for treatment as an independent director. An independent director cannot, apart from receiving his remuneration as director, have "any material, pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates", which may affect his independence.
This constraint rules out his being given, or his enjoying any stock options accessible to an employee, including an executive director, under any employee stock option scheme or the SEBI (ESOP and ESPS) Guidelines, 1999. He is almost like the Comptroller and Auditor General (CAG) of India and his men, with their merits and demerits in matters involving financial and intellectual integrity and initiative.
Everything which is likely to bias him or others in his favour is excluded in his selection relationship to the promoters or those in control and management of the company, past service as an officer of the company during the preceding three financial years, any interest in the company as an auditor or a lawyer associated in any manner with the company during the preceding three years, provision of supplies of materials or services and connections as a lessee or customer which may affect his independence.
The holding of 2 per cent or more of a block of voting shares of the company may render him ineligible for appointment as an independent director the relevant point of time to which the bar relates is obviously the date of his selection as an independent director. There is no prohibition on his shedding any part of his shareholding in the company in excess of 1.9 per cent when he offers his candidature for the post of an independent director if and when it is advertised by the company or he is approached for that purpose without an advertisement. He can, without inconvenience or embarrassment, transfer the excess stock to any one related to him such transfer will not be hit by the definition of `relative' in clause 49 of the Listing Agreement read with Sections 2(41) and 6 and Schedule A of the Companies Act, 1956.
What the Listing Agreement overlooks is the fact that an independent director will have to miss the incentives which are available to a `loyal' employee of the company and may be sacked without much ceremony. He can either be bought out or thrown out of the establishment if he is found to be an impediment in any manner to those in control of the company. His stake in the company will have no practical relevance where the company is dominated by a `promoter' notwithstanding its `listing', more so when the listing has served its purpose and is no longer of vital use to it.
If SEBI and the stock exchanges expect the independent director to be their man in the company, vigilant of all infractions of, or deviations from, the law, and at the same advancing the company's interests like its promoters, it is moonshine they will be merely creating a new cadre of self-conscious, conceited mavericks, tossed about from company to company, the circulation being faster where they prove to be a nuisance in any manner.
They may be facilitating the regulatory work of SEBI and lightening its burden but not making the listed companies more attractive for the investors. They will, in course of time, come to be identified as the intelligence/agents or professional whistle blowers or fifth columnists of SEBI liable to be isolated and always held `suspect' as their `big brother' from the Government. Of what value will a stake in the company be to them?
While a substantial interest in the voting shares may enthuse promoters to work harder for the company controlled and managed by them, it may be ridiculous to require part-time directors to own any voting shares in the company as a pre-requisite for availing of their services in the company. For instance, if the law reserves any proportion of the board of directors of a listed company for the fair sex, as it has done in the cases of cooperative societies in some States, will not a further condition that the non-executive directors, who may happen to be women, should also have a qualifying number of voting shares in the company make selection of such directors more difficult?
Mergers and demergers may also call for amendments to the Companies Act to protect independent directors rendered surplus to the resultant company or companies as the case may be. All things considered, the law will be well-advised to desist from the temptation to meddle with details of the composition of the board of directors of a company and venture into fixation of a ceiling or a minimum for the number of shares that are already held by a director before his selection or that may be acquired by him after his appointment.