Briefing on Board Independence

The new edition of the NSE Quarterly
briefing is on “Issues in
Board and Director Independence
” and is drafted by Professor “Bala” N.
Balasubramanian. The executive summary is as follows:
– Worldwide,
corporate governance best practices and regulations recognise the need for
boards and directors to be independent and objective.
– In a country such
as India, where concentrated ownership dominates the corporate landscape, the
main rationale for board and director independence is to protect the minority
shareholders from possible exploitation by the promoter or controlling
shareholder (CS), who may also act as the CEO.
– Despite a number
of regulatory initiatives to preserve it, ‘board independence’ continues to be
undermined in India.
– Factors that
inhibit board and director independence include the prevailing sense of
gratitude in the minds of independent directors (IDs) for CEOs and controlling
shareholders; IDs’ fear of losing board seat if they challenge the CEOs; and
deliberate attempts by CEOs to create competency deficits in the boards.
– Some (additional)
legal measures have been suggested; significantly, mandates for: (a) approval
of election and compensation of IDs by a majority of non-controlling
shareholders, (b) presence of majority of IDs for quorum of board meetings and
for approving key resolutions; and (c) IDs resigning mid-tenure to explain the
reasons for resignation to non-controlling shareholders.
– Deficiency in the
area of board independence cannot be entirely addressed by regulations alone;
CS and IDs need to walk the extra mile to address the issues.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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