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Thursday, Aug 04, 2005

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Din of independence

S. Ramanujam

A POPULAR view is founded on the hypothesis that "good corporate governance can happen only if there are independent directors on the board".

What is often overlooked is the so-called `expertise' of these independent directors. Most of them remain `far independent' from the business of the company with which they are associated.

They have no clue about the operations, nor any inclination to look at the problems faced by the company.

The independent director is now expected to be the conscience-keeper of the organisation. For this role, he expects to be compensated with non-wholesome director's remuneration, stock options, sitting fees, travel and lodging facilities. Besides, he also expects the company to insure all the directors with a policy (running into huge sum) known as `Directors and Officers liability Insurance'.

The regulatory authorities expect all in the corporate sector to follow the model followed by the software segment — probably the most protected industry.

If all the other industries were also as unregulated as the services sector, there can be no room for complaints. The problems faced by the manufacturing sector are there for all to see.

For instance, on the highways, trucks line up day after day for permits to move forward. Can anybody help discipline the check-post inspectors?

Those who laud the role played by independent directors in mediating between sparring members of business families, attribute the success to independence rather than mediating skills.

Extending the same logic, one can also advocate the theory that everyone should vote only for independents in any election.

Is this possible? Everybody's needs are different and the same cannot be standardised.

For instance, there this case of a sick textile mill in Ahmedabad, where the law did not permit an expert to join the board to turn it around.

This is because the expert would then be automatically disqualified from becoming a director in any other company owing to the defaults committed by the textile firm. It is another point that in spite of stringent laws, the entrepreneur resolved all his problems and created wealth for all shareholders.

On the other aspects of corporate functioning, suppose one had been a director of the cigarette company that won the historic legal battle spanning over many years. The balance-sheet for the year ended March 2005 would reveal the reversal of all the provisions made towards the disputed excise duty of more than Rs 1,300 crore and treated as extraordinary income.

What happened after the event? The company had to settle with the government for Rs 400 crore. If this is the situation, how can one talk of corporate governance?

The same holds good in respect of oil companies which are asked to support the subsidy programme of the government.

There is no explanation in the books about how shareholders' wealth is protected in these cases. Would more independent directors on the board have made any difference?

(The author is a Bangalore-based chartered accountant.)

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