Companies finding innovative ways to rotate independent directors

Following the end of the grandfathering period given to India Inc to replace their independent directors who had already served for 10 years, certain companies have come up with unique ways to replace the old guard.

Photograph: Larry Downing/Reuters

An analysis conducted by Institutional Investor Advisory Services (IiAS), a corporate governance and proxy advisory firm, shows independent directors who have completed over 10 years in one company are joining boards of another company of the same group, or they are being replaced by their sons or other family members.

Some independent directors are being replaced by ex-employees of the company or with executives belonging to professional firms.

“Several business groups are resisting change and finding ways to maintain old ties — whom they lose on the roundabout, they want to retain on the swing.

“While compliant with regulations, we believe these practices defeat the purpose of mandating rotation of independent directors,” IiAS has said in a note.

Under the Companies Act, the grandfathering period for independent directors who were on the boards of the same company since 2014 or before ended on March 31.

The regulatory mandate compelled companies to replace them with new directors.

“While several companies have yielded to the regulatory intent, a few have used different means to maintain the status quo,” said IiAS.

The proxy advisory firm has identified cases of at least four long-tenured independent directors who have been rotated within group companies.

“The relationship with the promoter group or family has been well-established through a long association, and therefore, it raises concern if the director is truly independent,” IiAS said.

It has identified about a dozen instances where a son has replaced an outgoing father as an independent director.

“Boards argue that the sons (or other family members) are equally competent, and this too may well be true — but the question of independence remains.

“Investors need to ask: Of the pool of candidates available, what was the process the Nomination and Remuneration Committee followed to narrow down on the family member of the retiring independent director, as being the most suitable and competent to fill the vacancy,” IiAS has said.

The governance firm has also frowned upon employees joining back as independent directors.

These ex-employees continued to maintain their board positions moving from executive director to non-executive director and later being reclassified as independent directors.

The three-year term as a non-executive director was considered as the cooling period.

The advisory firm said that such appointments raise questions on the independence, efforts by the Nomination and Remuneration Committee in finding the right director for the company, and the pool of candidates chosen for the selection.

Industry experts say that independent directors should be objective and provide a fresh perspective in decision making.

The intent behind inducting new directors was to improve governance and board composition.

The regulations require a minimum of one-third of the board to be independent.

IiAS in its report has also highlighted how companies seem to have almost reserved a seat for an independent director from the same law firm, audit firm, or professional firm.

“Usually, such firms tend to have business linkages, either with the company or with group companies, and sometimes with the promoters in their individual capacity,” it added.

“Regulations cannot be built in all possible scenarios, and Corporate India can be creative in sidestepping the regulatory intent.

“This cannot be good for overall governance standards and will likely attract more prescriptive regulation.

“It is best for Corporate India to stop sticking to the old and get in with the new,” noted IiAS.