Independent directors have got a new focus of attention, in terms of good governance practices. Codes, listing requirements under various jurisdictions, shareholder activists and governance experts emphasise that in order to have a balance board it is essential that independent directors, in a certain proportion, comprise the board of corporations.
The idea behind induction of independent directors is to bring a reasonable balance of judgement, essentially to see that they are independent members that do not weigh on a particular side. For instance in case of NYSE listing requirements, independent directors must comprise a majority of the board.
DEFINITION: An independent director is independent of management and free of any business or other relationship that could materially interfere with - or could reasonably be perceived to materially interfere with - the exercise of their unfettered and independent judgement.
DISCLOSURE OF INDEPENDENCE: The board should regularly assess the independence of each director in the light of interests disclosed by them, so that it can do this, each independent director should provide to the board all relevant information.
Directors considered by the board to be independent should be identified as such in the corporate governance section of the annual report. The board should state its reasons if it considers a director to be independent, notwithstanding the existence of relationships listed in Code of Governance.
In this context, it is important for the board to consider materiality thresholds from the perspective of both the company and its directors, and to disclose these.
For example, a board may decide that affiliation with a business which accounts for, say, less than X% of the company's revenue is, as a category, immaterial for the purpose of determining independence. If the company discloses the standard it adopts and makes a general statement that the relevant director meets that standard, investors are better informed about the board's reasoning.
The new recommendations in the USA among other things state that rules would force the independent directors of every company listed on the exchange to meet regularly without the management's presence. That group would have to name a lead director to preside over these sessions, and the panel could communicate directly with the employees and shareholders.
It has been experienced in the past that directors served the interest of only those that got them on the board. The presence of independent directors was to create a confidence that decisions would not solely be made to serve the interest of a particular group, putting those not adequately represented at a disadvantage.
THERE A HOST OF QUESTIONS THAT COME TO MIND ON THE APPOINTMENT OF AN INDEPENDENT DIRECTOR, WHICH INTERALIA REVOLVE AROUND THE FOLLOWING:
-- Finding the right person
-- Will he be able to contribute to the question of skill and acumen
-- Remuneration and paying for his skills and experience
-- Work as a team member
-- His willingness to come on the board
-- The issue of liability arising out of assuming such office
-- Some Chief Executive and Executive Directors have reservations on independent directors blending in the board. Their stance is that since this specie comes from outside, they are removed from the actual realities of the business issues and challenges.
This stance seems now to be losing grounds, as many studies show useful and meaningful contributions from the independent directors. Independent directors are totally aware of such facts and, therefore, gear themselves up to meet such challenges.
Each organisation has to see that how can it blend the expertise from outside and talent from inside to evolve an effective throughput from the board. While there may be reasons to believe that initially some time may be consumed for things to get adjusted. Yet it is expected from the board leader to be able to take advantage of both the worlds.
There has been a lot of debate particularly on the remuneration of the independent directors, as to what should they be paid and why should they be paid. While a host of surveys show a tilt in favour of independent directors to be rewarded for their time and efforts, yet some eye-brows have been raised.
Chief among those not in favour of any compensation to the independent directors are the Chief Executive, as many survey results portray.
The Chief Executive's stand is that paying them compensation will bring a dash on their independence, although internally they might relish such a move which might provide them a lever to get such directors on their side.
On the other hand those in favour of compensation to the independent directors have a logical thinking, behind their support. For instance many jurisdictions allow full board and audit committee members to hire and engage the services of outside experts should they deemed it appropriate for effective discharge of their duties and responsibilities.
Hence this makes a strong case for compensation, for the reasons that independent directors bring special skills and experience. As detached people from the management and day-to-day operations of the corporations, they should and will give their best judgements.
Moving forward from here, a lot of debate has gone as to what should be a fair compensation to such directors. Some proponents think that it should be correlated to the compensation of the Chief Executive, others on a benchmark that takes into consideration the preparation time for the meetings and attendance compensation. This has worked in many a set-up, and also does not disturb Chief Executives, who expect their compensation should be the highest amongst the board members.
Giving my support to the proponents who support compensation the basis should be left to the senior board members and those coming on the board as independent directors. In the ultimate analysis a compensation will be an incentive to independent directors, those taking seats as independents on the board are not likely to lose their independence, just merely by being rewarded.