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Why independent directors are quitting in droves

April 27, 2009 17:49 IST

Investment banker Nimesh Kampani faces arrest in his alleged role as director in the Nagarjuna Finance scam. Though he resigned in 1999, Kampani and executives of the Hyderabad-based finance company are under investigation for the firm's failure to return around Rs 98.3 crore collected from 85,160 depositors in 1997-98.

Though investigative agencies have cleared the names of former independent directors on the board of scam-hit Satyam, their peers say that a lot of them have lost credibility. That's the dilemma facing independent directors, who are quitting from the boards of Indian companies in droves: should they put their reputation at stake?

More than 500 independent directors have quit the boards of different companies since January 1 this year, driven by fear that their reputations may get tarnished if they get embroiled in a controversy. PRS Oberoi quit the board of Jet Airways, Nirmalya Kumar stepped down from the ACC board, Harsh Mariwala quit Mirc Electronics while Infosys co-founder NS Raghavan quit the board of Shobha Developers.

"There's a threat of liability as the laws in India are not well-defined. The bigger fear is reputation," said Prithvi Haldea, CEO, Prime Database, who has prepared a directory of independent directors three years back, but found few takers. Independent directors don't want to take the liability that may arise of any corporate governance issues, and any malafide role played by management or majority shareholders.

As a result, companies may find it difficult to retain or attract reputed independent directors, who have become highly circumspect, post-Satyam and are quitting in droves.  "They are saying enough is enough, not because they suspect the accounts; but they are not ready to undertake any liability," said Hinduja Group CFO Prabal Banerji.

Nirmalaya Kumar, professor of marketing at London Business School, who served on the board of ACC, said that the risks have become salient, post-Satyam and people are asking if it is worth it. Independent directors would like to only join companies with good corporate governance practices and if they are willing to pay the directors well. The first criteria may itself filter out 80 per cent of the companies.

Most Indian companies pay independent directors only Rs 5,000-Rs 20,000 as sitting fees. "If a reputed independent director wants to spend an entire day with the company, he expects to be compensated well," said Nirmalaya Kumar. To overcome this problem, some companies like Infosys have began offering independent directors incentives like token share of the profits (less than a per cent).

Companies with suspect corporate governance track record will find it difficult to get independent directors in future unless they have a clear gameplan to change their corporate governance track record. "Some of them may will find it really difficult to comply with the requirement of Clause 49 of the listing agreement as far as the need for independent directors are concerned," said Hinduja's Banerji.

JSW CFO Seshagiri Rao feels the problem is that independent directors don't want to spend time, they come for a couple of hours, rely on managements for numbers; it is difficult for them to understand the implicatons of any proposal in couple of hours.

"If there's a process by which they could get more involved, there's no problem. If you are able to satisfy the ID, provide full info, there's transparency, and also get them involved in some committee, then there's no problem," said Rao. 

Nirmalya Kumar thinks it's a chicken-and-egg situation. Independent directors don't spend enough time as they are paid a pittance by most Indian companies. If they are paid well, they could spend more time and get more involved.

Many promoters in India don't want strong independent directors or are not willing to pay. Haldea questions the concept: "It's a paradox. How are they independent? Promoters want to bring people they know. Which promoter would risk getting a stranger on the board?"

Ranju Sarkar
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