THE DEBATE INITIATED by the Securities and Exchange Board of India over the ideal proportion of `independent' directors on boards of listed companies for effective corporate governance has now been joined by the J. J. Irani Committee on Company Law, appointed by the Ministry of Company Affairs. In its report submitted to the Ministry, this Committee has advocated a one-third representation for independent directors, in contrast to the SEBI-prescribed 50 per cent norm that will come into force from the beginning of next year. Having said that, it also appears that the Irani Committee is not keen to be seen as working at cross purposes with the stipulations of a regulator appointed for overseeing the market for listed securities. Thus, even as it expresses a preference for a reduced proportion of independent directors on company boards, the Committee, in the same breadth, also says that the directions of regulators established under any other law may prevail if they are at variance to its own recommendations on the subject.

Within limits, the number of `independent' directors ought not to make any significant difference to the quality of governance provided by the management of a company. Viewed thus, it can be argued that the presence of even one-third of such directors could be just as effective in securing good governance as any larger number would. But the problem has never been with the `size' but of the parameters with which the `independence' of a person appointed to a board is sought to be established. The Committee feels that the existence of any significant pecuniary relationship between the company and an individual or that of close relatives of such an individual militates against that person's capacity to act independently of the interests of the promoter/management. But the problem with this approach is that the notion of a significant pecuniary advantage flowing from a directorship could vary from individual to individual. To someone figuring in the Fortune's list of global billionaires even the best that a company can offer in terms of pecuniary rewards flowing from a directorship may not be such as to seriously impair independent judgement. But for a corporate professional with no post-retirement sinecures even the sitting fees and a generous per diem allowance that a seat on the board typically confers, may be a significant sum. Would such a person appointed to the board not feel beholden to the promoter/dominant shareholder who might have been instrumental in getting him elected to that position?

More important, would such a person inspire confidence in the minds of minority shareholders for autonomous judgement even if actually seen to be doing so? The discerning among the minority shareholders see the current process of corporate governance as, at best, an exercise in `guided democracy'. Unless the process of appointments to the board is reengineered so as to neutralise the role of the promoter/dominant shareholder, the capacity for independent thinking of a person appointed to the board would, in the public perception at least, always be suspect.

© Copyright 2000 - 2009 The Hindu Business Line