The rise in appointments of independent directors on Indian listed companies marks a shift in corporate governance. Once symbolic, these roles have gained real influence.
While companies are adding independent directors, there is debate over whether they truly protect shareholders or simply join a privileged group.
Indian regulations require listed companies to appoint a set number of independent directors, often making up a significant portion of the board.
These directors are meant to oversee management, protect minority shareholders, review financials, and uphold ethical governance.
The number of companies seeking individuals to fill these independent director roles has increased substantially following the implementation of stricter corporate governance standards.
The mandatory retirement requirement for board directors after two consecutive five (5)-year terms resulted in hundreds of board seats becoming available each year. However, the increased number of openings has raised concerns about the risks of a concentrated boardroom elite.
Specifically, when independent directors serve on multiple boards of directors, it can lead to a small group of individuals wielding significant influence, which may limit diverse perspectives and weaken independent oversight.
Although regulations limit the number of directorships held by independent directors, many prominent individuals retain multiple appointments, raising questions about the level of independent oversight they can reasonably provide in their duties and the overall health of the board's independence.
The collapse of IL&FS in 2018, which left approximately ₹90,000 crore of debt, as well as problems at Yes Bank and DHFL, have all further illustrated the ineffectiveness of the independent director model.
Independent directors have not detected or prevented systemic problems at Companies, even after becoming aware of them. Many of these individuals rely heavily on information they receive from company management, thereby making it impossible for them to serve as independent watchdogs.
Independent directors also consider compensation before accepting appointments. Executive recruiting firms indicate that experienced independent directors at large Companies can earn between ₹15 lakh and ₹1 crore a year, based on meeting fees, commissions, and incentive-based compensation. Such compensation could compromise independence, especially when board fees are a primary source of income.
The current challenge is, therefore, to move beyond simply increasing the number of independent directors and instead enhancing their ability to perform their duties.
To truly be independent, independent directors must come from diverse backgrounds, have a higher degree of accountability, receive continuous training to maintain their professional competence, and be more transparent about the qualifications required to serve as an independent director.
Boards of directors must move beyond selecting individuals well-known to the board and instead choose independent directors with experience and expertise in academic, technological, sustainability, legal, and civil society professions.
Independent directors continue to be a significant and important part of modern corporate governance. However, the growing trend toward appointing independent directors will not change the fact that being an independent director is not a title but an obligation.
To strengthen the credibility of corporate governance, boards must actively prioritize competence and courage over connections and convenience when selecting independent directors.
The future of effective corporate governance depends on each board's commitment to making these choices and holding their directors to the highest standards of independence and accountability.
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