Scrap the System of Independent Directorship in the Board - Is this the solution?

What are the role and responsibilities of an Independent Directors?
How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……?

Does the self regulatory mechanism has the solution? How far SEBI or any other regulators been successful in controlling? Is scraping of the system of IDs has the solution?

The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders.

The role of the independent non - executive is slightly more onerous than that of ordinary non - executives as they must also be completely free from any “conflict of interest”. That means they cannot have any vested interests, whether by personal shareholding, contracts with the company or relationships with the management. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest.

The independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles.

When looking at the failures it is tempting to claim that the independents have failed miserably in their duties. But, when we consider the vast majority of companies that survive, or even thrive, the failures are a miniscule percentage of the greater whole of the listed companies. In most companies the independents, supported by ethical non-executive and executive directors, manage to represent the shareholders' interests faithfully and well.
The key issue is that we are dealing with a social system in a confidential operating environment. Ethical and tough directors will stand up for what is right. Unethical or weak directors will cave in to pressure and may do the wrong thing or simply turn a blind eye whilst others do the wrong thing or resign and go. It is impossible for regulators to regulate so that only ethical and strong people get onto boards.
Shareholders can help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviours in the boardroom:

· What skills each director brings to the board?
· How directors behave in the boardroom?
· What training needs were identified in the board performance review?
· What training has been delivered and what is planned?
· What specific governance/ director training do board members have?
Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director.

It is therefore, pertinent that the ethical side of directorship needs to be recognised and managed far more than it currently is. It is observed that things are improving slowly, but there is still much to do to get all the deadwood cut out of the boardrooms.

This article was published in Live Mint Lounge - Wall Street Journal - an Hindustan Times business paper on Posted on 29th May 2009 9:21:01 AM
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