Independent Directors and Uday Kotak Committee
The Uday Kotak Committee on Corporate Governance had given various recommendations on Independent Directors (ID). An ID is a director on a company’s Board other than a managing director, whole-time director or a nominee director. He / She is required to take an autonomous view of the going on in a company while overseeing its management.
Restrictions on appointment of ID
To ensure such autonomy, there are several restrictions on who can be appointed as an ID such as:
- ID must not be a promoter or related to promoter of the company, its subsidiary or associates.
- ID must not have been an employee of the company or of any audit/legal/consulting firm which earned a fee above a certain threshold from the company in the preceding three financial years.
- ID must not have had any pecuniary relationship with the company in the two preceding financial years or in the current year.
Importance of ID
They are important due to variety of roles expected out of them:
- Watchdog on the Board to ensure good governance; expected to take an outsider’s view and ensure checks and balances in areas such as strategy, performance, key appointments, remuneration, etc.
- Connecting link between the management of the company and its many diverse stakeholders; playing moderator to the conflicting interests that arise in these relationships.
- Monitor, seek clarifications and raise questions on the happenings in a company.
- Act as trustees of shareholders, especially minority shareholders. Regulatory scenario in India:
- Market regulator SEBI brought in the concept of IDs through Clause 49 of the Listing Agreement, 2000, which deals with corporate governance norms for listed companies.
- Over the years, the regulator amended the provisions to plug loopholes bringing in stricter norms for the selection and appointment of IDs and to give more credence to this role. Still a lot needs to be done:
- But despite strong regulatory backing, recent instances such as the Tata-Mistry spat or the Infosys Board shake-up show that more needs to be done. independent directors were unable to play impartial peacemakers.
- When IDs fail in their duty or when conflicts arise between the IDs and the management/ founders/promoters, shares of the company take a beating.
Uday Kotak Committee Recommendations
The Kotak committee seeks to strengthen the hands of IDs. Its key recommendations related to IDs are:
- Number of independent directors (IDs) on listed company boards be raised from one-third to half.
- Listed companies to appoint one women independent director.
- Organize more frequent exclusive meetings among IDs to discuss company affairs.
- Strengthens their accountability by making it compulsory for IDs to give detailed reasons if they resign before the end of their term.
- Provides minimum compensation for IDs.