Shareholders have issues about independence of independent directors

One of the top concerns raised by citizens over time has been the independence of independent directors, and their relationship with promoters both at personal and financial level.

According to a survey Corporate Governance Survey 2020, which was conducted by LocalCircles, 79 per cent individual shareholders believe that the Board of Directors of most Indian corporates is tilted towards promoters, as many independent directors are not really independent. It pointed out that one of the other concerns raised by common shareholders is that of paper directors, that is independent directors at publicly traded corporations, who exist merely on papers, and who get their retainer fee while participating in just few of the board meetings, and many times just skipping them altogether. According to shareholders, in some corporations such independent directors are friends, family or associates of the promoters, and rarely raise difficult and pertinent governance issues.

LocalCircles said the objective of the report is for the government to take action and increase shareholder trust in corporates and markets. Over the last couple of years, the role of independent directors has come under scrutiny many times. Alleged frauds at IL&FS, PMC Bank and Amrapali Group have been questioned as to how in some of these cases even seasoned directors were not able to foresee them. In the case of IL&FS, the management was accused of fraud with intent to injure the interests of the company, its shareholders and lenders, and the entire Board of 15 including several independent directors was sacked by the government. And most recently, the role of independent directors of Future Retail has been questioned and debated in courts.

The survey also highlighted that 65 per cent individual shareholders believe that independent directors in publicly listed Indian companies are not acting to protect the interest of minority shareholders. Only one per cent though that they were acting to protect the interest of the minority shareholder, only while 11 per cent thought that they were acting to protect the interest of both the promoters as well as the minority and common shareholders. It further stated that 23 per cent common shareholders responded with a “Can’t Say”. Such a high proportion of “Can’t Say” responses indicate another concern that many common shareholders lack clarity on the workings of the independent directors of companies whose shares they have invested their savings in.

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People, as per the report, believe that independent directors should ideally be a voice that represents, especially minority shareholders’ interest and be their representative to ensure that all corporate governance norms are being adhered to by the company. Moreover, if independent directors play their role effectively, it will lead to an increased confidence among any company’s investors and shareholders, which in turn will have a positive impact on market capitalization of the company.