Regulatory Spotlight on Independent Directors in India
A special report in the October 2011 issue of The Economist debates Indian cheerleaders’ hope that India can leap from sclerotic socialism towards a western form of institutionally-run capitalism. But Indian businesses have not piggybacked on anyone else’s economic model, whether the Chinese, European, or American standard. Instead its economic journey may best be described as “Capindialism,” in which profits are controlled not by institutional shareholders but mainly by the state and /or by entrepreneurs and their descendants. This, coupled with the country’s rapid economic growth, created a plethora of unusual problems for the regulators in India.
The year 2009 was a watershed period for corporate governance in India, thanks to the biggest scandal in Indian history: Satyam Computer Services and Nagarjuna Finance. Not only did these events erode investors’ confidence both domestically and overseas, independent directors also became apprehensive about their roles and responsibilities — leading to the resignation of more than 500 independent directors from the boards of different Indian companies. This exodus of independent non-executive directors (INEDs) questioned the institution of independent directors, and had deleterious consequences on corporate governance reforms in India. Debate on whether the cause was implementation or enforcement failures raised important questions as to the acceptability of transplanted concepts of corporate governance in the Indian context.
Amidst this backdrop, the Stock Exchange Board of India (SEBI) began progressing optimistically towards creating and sustaining a corporate governance framework to reach a globally accepted standard. SEBI cracks the whip occasionally, and corporate code violations are examined closely for strict compliance to Clause 49 of the listing agreement, which was formulated to improve corporate governance in listed companies.
The Indian government has also been attempting an overhaul of the decades-old Companies Act of 1956. The proposed Companies Bill, 2008 (still pending in the Indian Parliament) is expected to offer a glimmer of hope towards a new corporate responsibility framework, including greater roles and responsibilities for independent directors, better shareholder democracy, and less government intervention.
The Indian Association of Investment Professionals, a member society of CFA Institute, is also committed to increasing awareness regarding the importance of corporate governance in India; it recently conducted a forum with the CFA charterholders and members to discuss corporate governance lessons learned from Asia.
Meanwhile, SEBI — in its continued efforts to create awareness of the roles and responsibilities of independent directors in India — reached out to CFA Institute to co-organize a seminar in Mumbai along with the National Stock Exchange of India, Bombay Stock Exchange, and National Institute of Securities Markets. Speakers and panelists with experience from Asian countries like Hong Kong, China, Singapore, and Malaysia joined hands on a common platform with speakers from India and the United States to have a dynamic debate on the effectiveness of independent directors within the corporate landscape in Asia. They also discussed the gap between expectation and delivery of the duties and responsibilities of independent directors to management and investors.
The forum was very well attended by CEOs, CFOs, academics, corporate secretaries, and other experts who discussed potential solutions including the introduction of cumulative voting for the election of directors (currently allowed in China and the Philippines), minority shareholder representation on the board, and making announcements when independent directors resign.
The speakers exchanged their thoughts on various regulatory provisions across jurisdictions in the region. It was highlighted that Singapore and Hong Kong have also worked towards lifting the standards in listed companies by revising their corporate governance codes earlier this year. Both Singapore and Hong Kong mandate a strong and independent element on the board, with independent directors making up at least one-third of a board’s composition. In Singapore, independent directors should make up at least half of the board when the chairman and the CEO are the same person; the chairman and CEO are immediate family members; the chairman is part of the management team; or the chairman is not an independent director. In Malaysia, the separation of CEO and chairman is mandatory. Challenges shareholders face in a “controlled company” like Facebook in the United States was also discussed.
CFA Institute in its widely recognized report, Independent Non-Executive Directors – A Search for True Independence in Asia, has clearly identified and presented solutions and recommendations for all of the main areas of concern, namely director nomination and appointment, the concept of independence, director training and qualification, and board composition. CFA Institute has also conducted an empirical study and recently released a report, Board Governance – How Independent Are Boards in Hong Kong Main Board Companies?, to ascertain the level of independence of boards of Hong Kong main board companies and the level of compliance with Hong Kong regulatory requirements. Only a small number of Hong Kong main board companies were found to have independent directors constituting a majority of the board.