Srinath Sridharan

Policy Researcher and Corporate Advisor

WITH THE BULK of major Indian businesses being promoter-led, the concept of the independence of corporate governance needs reiteration at the board level, more so since promoter-led entities account for most of the recent corporate crises. This has made the need for even independent chairpersons more pronounced. To cite an example, recently, a Nifty-500 entity saw its promoter's marital feud play out, with the Board expected to show a rather indecent resolve (solely considering the particular circumstances) to preserve enterprise value and business continuity. With a surge in new companies getting listed, the urgency for the Securities and Exchange Board of India (Sebi) to upgrade the corporate governance norms-last updated in 2018-can't be shrugged off.

Sebi, in 2018, had addressed board composition, roles and responsibilities, transparency, and disclosure norms. A lot has happened since then-startups, a widening of corporate issues, the need for increased governance, etc. A rapidly growing economy, with expanding public markets, necessitates constant upgrade of corporate governance regulations.

Similar to what many global markets have, the introduction of a Lead Independent Director (LID) in boards is essential to ensure that as these Indian listed entities proliferate, they do so with a foundation built on transparency, accountability, and independence. The role of the LID-or alternatively, the senior independent director or independent deputy chair-holds paramount significance within the board structure. Acting as a versatile intermediary between the board chair, the board itself, and between various other stakeholders, the LID is pivotal in fostering positive relationships during normal times and, crucially, in navigating and resolving challenges during periods of stress.

As an experienced director with no other ties to the company, a LID acts as a counter balance to executive influence, ensuring a fair and objective decision-making process. This is especially relevant considering the majority of top-500 listed entities are controlled by Indian business families, and there is minimal willingness to split the role of the chairperson and MD. In instances where the board chair lacks independence, particularly when combined with the role of the chief executive, the presence of an LID becomes an essential one to bring what current regulations lack in practice.

Given splitting of board and executive roles is now voluntary in India, LIDS have become a necessity. They must be given the authority to convene meetings of independent directors and engage external advisors who report directly to the board of directors.

The United States regulations mandate the annual election of an independent director to serve in a lead capacity when the roles of the chairman of the board and CEO are consolidated. In practice, LIDs need to be empowered with the authority to convene meetings of independent directors and to have the power to engage external advisors and consultants who report directly to the board of directors on matters of board-wide significance. This positions the LID as a key facilitator in addressing complex and crisis situations and contributing to the overall effectiveness of the board.

Furthermore, the LID serves as a vital link between independent directors and the CEO, fostering an open dialogue for constructive feedback and strategic alignment. Emulating global best practices, many large global corporations routinely provide regular CXO briefings to the LID, ensuring the board remains consistently abreast of pertinent business information. This proactive engagement empowers the LID to make informed decisions on whether immediate board meetings are necessary. In the contemporary market, characterised by rapid changes and external uncertainties, a quarterly update may prove insufficient, underscoring the imperative for agile and timely decision-making.

While the law must clearly distinguish between non-executive and executive roles, it is essential to strike a balance that prevents the LID role from being perceived as purely charitable or altruistic. Thanks to regulatory myopia over prevalent market practices, critical questions about the efficacy of current oversight frame-works abound. Often, compensation to the directors extends far beyond the confines of mere sitting fees, with structures involving sweat equity discreetly parked in the names of family and friends, discreet cash payouts, and luxurious perks such as chauffeured cars or plush accommodations-often paid through unrelated entities detached from the boards they purportedly serve.

This regulatory inertia inadvertently fosters an environment where board compensation takes on 'shades of gray', compromising transparency and accountability. To truly champion better board governance stewardship, regulators must acknowledge and adapt to the multifaceted nature of director compensation, fostering an environment that aligns remuneration with the role and expertise of directors rather than perpetuating a system susceptible to opacity and potential ethical lapses.

In practical terms, recognising the increased responsibilities placed upon LIDs, the regulations should be adaptable to acknowledge the additional time and expertise required for the role. Adequate compensation is not just a matter of fairness but also a crucial element in attracting and retaining highly-qualified individuals. In the 21^st century, regulators cannot live with vestiges of prestige as a replacement for the monetary recognition of the expertise and time of board members!

Granting companies the flexibility to provide board members with annual retainers, in addition to traditional sitting fees, can be a good regulatory move. This approach incentivises board members to concentrate on their designated duties and responsibilities, acknowledging that a board role extends beyond mere attendance at meetings. Shifting towards annual retainers discourages the potential for unnecessary meetings solely aimed at boosting director compensation, promoting amore outcome-driven and value-centric approach to board service.

As India anticipates the retirement of a cohort of seasoned independent directors over the next five years, building and maintaining trust in the evolving landscape becomes paramount. With the increasing number of listed entities, there is a compelling need to foster confidence in newer experts who will assume these crucial governance roles. Not only does the LID role provide stability by offering a central figure for guidance, but it also serves as a mechanism for grooming the next generation of independent directors.

Note: Views expressed in the article are of the author/writer/publisher and do not represent the stand of IICA.

(IICA duly acknowledge the ownership/authorship of the article and republishing the same only for educational purpose.)