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Friday, September 3, 2010

Company Law - ROLE OF SHAREHOLDERS’ DIRECTOR IN CORPORATE GOVERNANCE

~CHAPTER 1~
INTRODUCTION
It is almost a truism that the adequacy and the quality of corporate governance shape growth and the future of any capital market and economy. The concept of corporate governance has been attracting public attention for quite some time in India. The topic is no longer limited to the halls of academia and is increasingly finding acceptance for its relevance and underlying importance in the industry and capital markets. Progressive firms in India have voluntarily place systems of good corporate governance. Internationally also, while this topic has been accepted for a long time, the financial crisis in emerging markets has led to renewed discussion and inevitably focused them on the lack of corporate as well as governmental oversight. The same applies to recent high-profile financial reporting failures even among firms in the developed economies. Focus on corporate governance and related issues is an inevitable outcome of the process, which leads firms to increasingly shift to financial markets as the pre-eminent source of capital. In the process, more and more people are recognizing that corporate governance indispensable to effective market discipline. This growing consensus is both an enlightener and a realistic view. In an age where capital flows worldwide, just as quickly as information, a company that does not promote a culture of strong, independent oversight, risks its very stability and health. As a result, the link between a company's management, directors and its financial system has never been more crucial. As the boards provide stewardship of companies, the significant role in their efficient functioning.
Strong corporate governance is thus indispensable to resilient and vibrant capital market is an important instrument of investor protection. It is the blood that fills the veins of transparent corporate disclosure and high-quality accounting practices. It is the muscle that moves a very accessible financial reporting structure. Without financial reporting premised on sound, numbers, capital markets will collapse upon themselves.
One of the principle characteristics of efficient corporate governance is the ability of independent directors to approve the overall strategy, oversee the performance of management and participate and take an independent stance on major decisions. Independent directors form the cornerstone of good corporate governance. Their key role is to provide an unbiased, independent, varied and experienced perspective to the board. The independent directors of the Corporation play an important role in the deliberations of the board meetings and bring to the Corporation their wide experience in finance, housing, management, accountancy, law, public policy, engineering and corporate strategy. The Corporation benefits immensely from their expertise in achieving its strategic direction.

~CHAPTER 2~
RULES REGARDING SHAREHOLDERS’ DIRECTOR
The Companies Amendment Act, 2000 has empowered small shareholders to elect directors from amongst themselves. A public limited company must have at least 3 directors. After the enactment of the Companies Amendment Act, 2000, a public company having paid-up capital of Rs.5 crores or more and 1000 or more small shareholders may have at least 1 director elected by small shareholders in the prescribed manner.
A small shareholder is a shareholder holding shares of nominal value of Rs.20000 or less in the company.
The Ministry of Law, Justice and Company Affairs, Government of India has, vide notification number G.S.R.168 (E) dated 9 March 2001 notified the Companies (Appointment of the Small Shareholders’ Director) Rules, 2001 for prescribing the rules for this purpose. These rules have come into effect on the date of their publication in the Official Gazette.

Manner of election of small shareholders’ directors
1. A company may act suo-moto to elect a small shareholders’ director from amongst small shareholders or upon the notice of small shareholders, who are not less than 1/10th of total small shareholders and have proposed name of a person who shall also be a small shareholder of the company.
2. Small shareholders intending to propose a person must leave a notice of their intention with the company at least 14 days before the meeting under the signature of at least 100 small shareholders. Such notice must specify the name, address, shares held and folio number and particulars of shares with differential rights as to dividend and voting, if any, of the person whose name is being proposed for the post of director and of other small shareholders proposing such person as a candidate for the post of director of small shareholders.
3. A person whose name has been proposed for the post of small shareholders’ director shall sign, and file with the company, his consent in writing to act as a director.
4. A listed public company must elect small shareholders' nominee subject to sub-rules (1), (2) and (3) above through postal ballot.
5. An unlisted company may appoint such small shareholders’ nominee subject to above conditions if majority of small shareholders recommend his candidature for the post of director in their meeting.
6. Tenure of such small shareholders’ director shall be for a maximum period of 3 years subject to meeting the requirements of provisions of the Companies Act, 1956 except that he need not have to retire by rotation.
7. On expiry of his tenure, the same person if so desired by small shareholders, may be elected for another period of 3 years.
8. Such director shall be treated as director for all other purposes except for appointment as whole time director or managing director.

Disqualification
A person shall not be capable of being appointed as small shareholders’ director of a company, if: -
• He has been found to be of unsound mind by a Court of competent jurisdiction and the finding is in force;
• He is an undischarged insolvent;
• He has applied to be adjudicated as an insolvent and his application is pending;
• He has been convicted by a Court of any offence involving moral turpitude and sentenced in respect thereof to imprisonment for not less than six months, and a period of five years has not elapsed from the date of expiry of the sentence;
• He has not paid any call in respect of shares of the company held by him, whether alone or jointly with others, and six months have elapsed from the last day fixed for the payment of the call; or
• An order disqualifying him for appointment as director has been passed by a Court in pursuance of section 203 and is in force, unless the leave of the Court has been obtained for his appointment in pursuance of that section.

Vacation of office
A person appointed as small shareholders’ director shall have to vacate the office if: -
such person so elected, as director of small shareholders ceases to be a small shareholders’ director on and from such date on which he ceased to be a small shareholder;
• He has been rendered disqualified by virtue of the aforesaid sub-rule (i) for disqualification;
• He fails to pay any call in respect of shares of the company held by him, whether alone or jointly with others, within six months from the last date fixed for the payment of the call;
• He absents himself from three consecutive meetings of the Board of directors, or from all meetings of the Board for a continuous period of three months, whichever is longer, without obtaining leave of absence from the Board;
• He is a partner any firm which accepts a loan, or any guarantee or security for a loan or any private company of which he is a director, accepts a loan, or any guarantee or security for a loan, from the company in contravention of section 295;
• He acts in contravention of section 299;
• He becomes disqualified by an order of Court under section 203;
• He is removed in pursuance of section 284;

Restriction on number of directorship
No person shall hold office at the same time as small shareholders’ director in more than two companies.

It has been a long-standing plea of the small investors that some of them may be permitted to be on the Board of Directors of companies in which they have invested, to represent their views and safeguard their interests. Investor protection, being the mantra of corporate governance, it is small wonder that the Companies Act, 1956 was amended by the Companies { Amendment} Act, 2000 to provide for the first time, that a public company having paid-up capital of Rs. 5 crore or more; 1,000 or more small shareholders may have a director elected by such small shareholders in the manner as may be prescribed. This seems to be a very laudable step in the right direction. One may, however, ponder on the situation where in spite of the small shareholders’ director in place, he may be effectively neutralized by the overwhelming majority of the Board on matters of strategic importance vitally affecting the small investors interests. Thus the avowed objective of the law could be soundly defeated. There may, therefore, be need for provision to ensure that such director does not become a puppet remaining only for decoration of corporate governance. Thus legal provisions could be laid down for reporting in the Directors’ Report or to the Government where such director has been out-voted at Board meetings in respect of matters of investor interests. There is of course no guarantee that such provision will yield the desired results. In addition to this, it may be pertinent to give a thought, here, that a person elected as a small shareholders’ director may be considered for inclusion in the Audit Committee. With the growing importance of such Committee, this thought may be worthwhile.

The Section

a) Amended section 252 of the Companies Act 1956 {the Act} lays down the law on this novel concept. It is clear that it does not apply to private companies but only to public companies which could be listed or non listed. However, while reading the section, a doubt may arise about the applicability of the provisions to a company having the required capital/ number of small shareholders. The reason is the lack of use of conjunction like "and"/ "or" between clauses (a) and (b) of proviso to sub-section (1). Therefore it is not apparent whether stipulations of paid-up capital and the number of small shareholder will have to be met together or meeting any one of them is sufficient. This needs to be clarified. The Government’s view before the Parliamentary Standing Committee, in this regard, does not throw any light. However from the clause 122 of the Companies Second Amendment Bill, 1997 it was evident that both the criteria would have to be met.

b) The explanation to sub section {1} defines the small shareholder to mean who holds shares of nominal value of Rs twenty thousand or less. The shareholder could be Equity as well as Preference shareholder. Section 86 of the Act, now permits issue of equity share capital with differential rights. Thus holders of this type of shares will also be eligible. Significantly the Rules notified in this regard has narrowed down the applicability to the equity shares with differential rights in respect of only dividend and voting and not otherwise. The reason is not obvious.

c) Another point of doubt arises because the word ‘shareholders’ has been used. It is not comprehensible why the word ‘members’ has not been used in place of shareholders as has been done in other sections like 172, 174, 175, 176 etc of the Act. It is well known that a shareholder is not necessarily a member unless his name is entered in the register of members [section 41 of the Act].

d) Basically the section provides for minimum number of directors. As per this, every public company has to have minimum three directors and other companies that includes deemed public companies, two directors. With the concept of deemed public company becoming inapplicable by the Companies {Amendment} Act, 2000, the section should have been duly amended. It was not done. What is more, providing for law of small shareholders’ director in this section without corresponding amendment in the heading of the section does not seem to be in consonance with good drafting of law.

Rules Prescribed

The Rules notified viz. Companies (Appointment of the Small Shareholders’ Director ) Rules, 2001 makes one to raise a few points as follows:

The section 252 uses the word "may" implying thereby that a company may choose to have director elected by its small shareholders. Notably the Companies Bill originally used the word "shall" to denote that the provision would be mandatory. But that was diluted. In such a situation even if small shareholders invoke the provisions, a company may decide not to implement the procedure. This does not become apparent on reading of the Rules and should be provided unmistakably. In fact it should also be provided as to the manner in which the Board should decide whether it will choose to have such director or not.

1. Rule 4{1} provides that a company may act suo moto to elect a small shareholders’ director or upon notice of not less than 1/10th of total small shareholders proposing a name of a small shareholder to this effect. The question which comes to mind is that where a person has been proposed as director by the Board, suo moto, and before his election at the meeting the company receives the statutory notice proposing the name of another person; then what happens? Do these two persons compete with each other for election or their elections are considered separately for appointment of two directors? A clarification on this aspect may be desirable.

2. Rule 4{2} lays down that not less than 100 small shareholders shall leave a notice of the proposal with the company at least 14 days before the meeting giving the required particulars. From the language it is not apparent whether 14 days will be these days exclusive of the day on which the notice is served or deemed to be served and the day of the meeting as provided in section 190 of the Act {Resolutions requiring special notice}. This provision is however akin to section 257 in respect of proposing the name of a person other than retiring director to stand for directorship and section 188 regarding circulation of members resolution, where clear days notice is not laid down. In any case, it is advisable to give clear 14 days notice to obviate complications. And section 51 has to be complied as per which the document should be served on the company at its registered office through permitted mode.

The next step should be the company informing its members about the notice, in line with the provisions in sections 190, 188, 257 as aforesaid. But the question is whether the company needs to do this as there is no such provision? This definitely needs to be amended.

3. Rule 4{3} mandates the person whose name has been proposed as director to file with the company his written consent to act as director. This is analogous to provisions of section 264{1} of the Act but the better provision should have been to file this consent along with the notice referred in above Rule 4{2}.

4. As per Rule 4(4), a listed public company shall elect small shareholders’ nominee through the postal ballot. But then the important question is whether the resolution should be ordinary or special? Nothing has been mentioned in these Rules. If one tries to take assistance from section 192A of the Act in respect of postal ballot, the position remains unclear as it mentions about "requisite majority". If one refers to the Companies { Passing of the Resolution by Postal Ballot} Rules 2001, one is no wiser. It does however, specify election of such director as one of the businesses listed for which postal ballot has to be followed and also defines "requisite majority" with regard to special resolution and ordinary resolution. One may therefore have to apply the existing provisions of the Act for appointment of director, which requires ordinary resolution.

5. Rule 4{5} stipulates that an unlisted public company may appoint such director if majority of small shareholders recommend his candidature in their meeting. The provision is ambiguous. What this Rule appears to provide is that majority of small shareholders should propose the name of a person through the notice and recommend his name in the meeting. Other conditions will of course apply. But the extent of majority has not been specified. In absence, one can only conclude - a simple majority.

6. Pursuant to Rule 4{6} the tenure of small shareholders’ director shall be maximum period of three years and he need not retire by rotation , thus he should be within the 1/3 limit of total number of directors who may be non rotational [Section 255{2} of the Act]. Since maximum period has been prescribed, it could be less than three years. But when it comes to his election for further period, Rule 4 {7} lays down that he may be elected for an another period of three years. Here the word "maximum" has not been used. As such there does not seem to be option for tenure of less than three years. There seems to be a drafting error as this cannot be the intention. Pertinently, as per Rule 4{8} he cannot be appointed as whole time director or managing director; except for this he is a director for all purposes. That means his role is basically restricted at Board meetings. He cannot be given responsibilities and duties which may put him in a position of deemed MD or WTD. Further, if there is to be any amendment relating to his appointment, he being a non rotational director, section 268 will apply and approval of Central Govt will be required.

7. Rule 5 stipulates about the disqualification of a person for being appointed as small shareholders’ director. On perusal of this Rule, it is clear that section 274 of the Act has been reproduced here except its new sub section {1} {g} which provides for disqualification where a public company has failed to file annual accounts, annual returns, repay deposits, redeem debentures etc. Now what does this imply? If essentials of section 274 have been reproduced in the Rules but not its sub section {1} {g}, does that mean the provision of this sub section will not apply to a small shareholders’ director? As Rules cannot over ride the provisions of the Act , it is to be interpreted that the provisions of the sub section will apply. But one fails to comprehend as to why Rule was made in these words to create confusion.

8. A perusal of Rule 6 it becomes clear that it reflects section 283 of the Act regarding vacation of office by directors. The new provision is that a small shareholders director ceases to be director if he ceases to be a small shareholder. It is clear that section 283 will continue to apply here as there has been no exclusion.

9. Rule 7 stipulates that a person cannot hold, at the same time, small shareholders’ directorships exceeding two companies, which for all practical purposes will be public companies. It therefore appears that he can hold other directorships in other companies. But section 275 of the Act, in respect of limit of overall directorships of 15 companies, will apply. He is also not restricted to be member of audit sub committee or any committee of directors but clause 49 of the listing agreement laying down the limit of membership in ten committees will apply.

~CHAPTER 3~
ROLE OF SHAREHOLDERS’ DIRECTOR IN CORPORATE GOVERNANCE
The board of a company comprises of executive and non-executive directors. Though the law treats them simply as directors and both carry equal responsibility, they have different roles to play. The non-executive independent directors are generally given the chairmanship of important committees like Audit committee, Nomination committee and remuneration committee. They are closer to action. They can question the executives directly. They observe from a distance how well executives are performing their duties. An attempt has been made in this article to critically analyze the role and effectiveness of independent non-executive directors especially in the light of Higgs Committee Report in U.K.

Duties And Responsibilities Of Directors
A director should first understand his relationship with the company and the shareholders as this relationship is what shapes his roll and responsibilities vis a vis the company and the shareholders. Unfortunately, there is no statutory provision to define this relationship. It is the judiciary which has over a period of time defined the relationship. As early as in 1866, that is about a century and half back, in Ferguson Vs. Wilson, the Chancery Division held that a company though a legal entity, cannot act by itself. It can act only through its directors and as such the relation of a director with the company is that of principal and agent and therefore general principles of law of agency would govern the relationship between the company and the directors. The relationship was further defined in Forest of Dean Coal Mining company case by Chancery Division in 1878 that directors, having been entrusted with the affairs of the company, are trustees of the company and therefore they are in a fiduciary relationship with the company. These judicial pronouncements have been universally accepted and applied all over and now the position of directors' vis-Ă -vis the company is that they are not only agents but also trustees. This relationship would mean that the directors should always act in the interest of the principal that is the company and in discharge of their fiduciary responsibilities, they cannot benefit at the cost of the company.

As far as the relationship with the shareholders is concerned, the legal position which has evolved over a period of time, is that the directors are neither agents nor trustees of the shareholders but special circumstances depending on facts of a particular circumstance may give rise to that relationship.

In Principles of Modern Company Law, 6th Edition, 1997, Gower has summarized the legal position as (quote) "In applying the general equitable principles to company directors, four separate rules have emerged. They are (1) that directors must act in good faith in what they believe to be the in the best interest of the company (2) they must not exercise powers conferred upon them for purposes different from those for which they are conferred. (3) that they must not fetter their discretion as to how they shall act and finally that without the informed consent of the company, they must not place themselves in a position in which their personal interests or duty to other persons are liable to conflict with the duties to the company".

Thus over a period of time the view that a director's duties to a company is that of a man of ordinary prudence has changed and now it is more than that of a man of ordinary prudence.

The role and responsibility of an individual director, of course, would depend upon the nature of his directorship. Broadly, there are three types of directors. Full time, executive director who is normally a paid employee of a company having some functional responsibility, non executive but non independent director who is normally a promoter of the company or having high stakes in the company and finally independent directors who are not full time directors. There is another class of directors known as nominee directors representing some interests like lending institutions etc. An executive director, by very nature has much more responsibilities than non executive directors. In law it is their responsibility to ensure compliance with provisions of law failing with they could be held liable as officers in default. As far as independent directors are concerned, the position of law is nebulous.

Of late there has been great emphasis in appointing independent directors on the Boards of companies. On the basis of Naresh Chandra Committee Report, in the new Companies Bill introduced in the Parliament, certain provisions have been made in relation to independent directors. These provisions do not define an independent director but only specify grounds which would disqualify a person from being considered as an independent director. The rationale of having independent directors on the Board of a company is with an idea to keep a special eye on the finances of a company particularly through the audit committee. It is a known fact that most of the companies which went into difficulties in USA did have independent directors. Mere presence of directors who are independent in terms of the provisions of law does not mean that there would be checks and balance. What is to be ensured is that these directors think and act independently. Even though in law, the directors are to be elected by the shareholders, yet, in practice, the directors proposed for election are normally the nominees of the promoters.

The selection and appointment of independent directors should be transparent and on certain valued basis. Therefore, the companies should have an entirely independent nomination committee which should determine the qualifications for Board membership and should identify and evaluate candidates for nomination to the Board. It would be more appropriate that the code of Corporate Governance of a company should specifically include the qualifications and attributes that the company seeks of an independent director. A critical element of a director being independent is his independence to the management both in fact and perception by the public. In considering the independence, it is necessary to focus not only on whether a director's background and current activities qualify him as independent but also whether he can act independently of the management. In other words, the independent directors must not only be independent according to the legislative and stock exchange listing standards but also independent in thought and action i.e. qualitatively independent. Such qualitative independence will ensure that directors think and act independently without regard to management's influence.

Qualitative directors' independence should include the will and ability in terms of knowledge and experience to ask the hard questions required to provide effective oversight and character and integrity in general and especially in dealing with potential conflict of interest situations. The Board to be successful should have mix of skills and should be tailored to meet the needs of the company. Even though, there could be no precise mix of qualifications and experience, which will depend on various factors, yet, specialists in the areas of accounting and finance, technology relevant to the company, corporate management, marketing and industry knowledge etc could be considered for independent directors. Perhaps, a skill matrix which lists desirable competency versus those presently present on the Board is useful in determining where the holes exist on the Board, which skills compliment each other etc. Board dynamics are difficult to prescribe as groups of people gather together to make informed decisions about the direction of the company. Although, the level of knowledge, integrity and independence necessary to carry out the functions of a director are difficult to summarize, the behavior characteristics of a good director should include the attributes of asking the hard questions, working well with others, having industry awareness, providing valuable inputs, availability when needed, be alert and inquisitive, making long range planning contribution etc.

The independent directors could effectively and substantively contribute if they are empowered to meet at regularly convened executive sessions without participation of management or employee directors so that they could openly and freely discuss the affairs of the company. There has always been a conflict of opinion as to whether the combination of the position of Chairman and CEO is preferable or two different persons should hold these positions independent of each other. Each has its own merits and demerits and it is for the Board to decide the best alternative that is suited to the company.
Accountability is an important element of Board effectiveness. There should be some mechanism for evaluating the performance of the directors. Perhaps, a system of 3 tier director evaluation mechanism could be evolved by which the performance of the Board as a whole, the performance of each committee and performance of each individual director is assessed. Since the shareholders who elect the directors lack the knowledge of the inner working of the Board, the Board could disclose their mechanism and process of the 3 tier evaluation to the shareholders. How and in what manner the evaluation is to be carried out has to be specifically spelled out by the Board.

Now comes the liability of the directors. There are two types of directors liability. One relating to statutoty compliance and the other is in relation to their fiduciary obligations. The Companies Act and other Acts lay down various requirements on the part of the company and most these provisions provide for penal action against the directors. As I have said earlier, the extent of liability of a director would depend on the nature of his directorship. No doubt, full time directors being offices in default have to be fully liable while part time directors may not be so liable. But as far as fiduciary duties/obligations are concerned, any breach by any director would visit them with liability. Our Supreme Court has considered this issue of fiduciary liability. It has observed in Official Liquidator Vs. PA Tandulkar (AIR 1973 SC 1104) [As mentioned by shri S.Balasubramanian in one of his speeches.]

The Higgs Report
The report by Derek Higgs into the role and effectiveness of non-executive directors was published on 20 January 2003. The report lays considerable stress on more demanding and influential role of non-executive directors (NEDs). The report is so comprehensive that it can definitely serve as guide to the corporate in our country.

Role Of Non-Executive Directors
The non-executive directors should:
1. contribute to and constructively challenge development of company strategy.
2. Scrutinize management performance.
3. Satisfy them that financial information is accurate and ensure that robust risk management is in place.
4. Meet at least once a year without the chairman or executive directors - and there should be a statement in the annual report saying whether such meetings have taken place.
5. Be prepared to attend AGMs and discuss issues relating to their roles (especially chairmen of committees).
6. Have a greater exposure to major shareholders (particularly the senior independent director).

Senior independent non-executive director
currently, the Code recommends that there should be a recognized senior independent NED (irrespective of whether the roles of chairman and CEO are combined) who must be identified in the annual report.
The Report envisages an expanded role. Currently the Code tasks the senior independent director as the person, other than the chairman, 'to whom concerns can be conveyed'. The Report proposes that the senior independent director should be available to shareholders if they have concerns that have not been resolved through the normal channels, or for which contact through the normal channels is inappropriate. In addition, the senior independent director should develop a balanced understanding of the concerns of shareholders by attending sufficient of the regular meetings between management and the major shareholders.

The Report contains guidance on the recruitment and appointment of NEDs, and envisages a more developed role for nomination committees (which should consist of a majority of independent NEDs and be chaired by an independent NED

The meaning of independence
When the board determines that the director is independent in character and judgment and there are no relationships or circumstances which could affect or appear to affect the director's judgment'. Such relationships or circumstances would include cases where the NED:

* is a former employee of the company or group - the NED will only be treated as independent five years after the employment has ended;
* has a material business relationship with the company either directly, or as a partner, shareholder, director or senior employee of a body that has such a material relationship - the NED will also cease to be independent if he has had such a relationship within the last three years;
* receives or has received additional remuneration from the company beyond the director's fee;
* participates in the company's share option scheme or a performance-related pay scheme;
* is a member of the company's pension scheme;
* has close family ties with any of the company's directors, senior employees or advisors;
* holds cross-directorships or has significant links with other directors via involvement in other companies or bodies;
* has served on the board for more than 10 years; or* represents a significant shareholder.

Tenure and commitment
Stricter recommendations are introduced relating to the re-election of NEDs. Under the Code as it currently stands, NEDs are required to be appointed for a specific term and then be subject to re-election thereafter at intervals of no more than three years. There is currently no maximum term (although various shareholder bodies already envisage that a NED's 'independence' will be lost after 10 years' service).

The Report limits the term that can be served by a NED. It recommends that a NED should normally be expected to serve two three-year terms unless exceptional circumstances make a longer term appropriate. Any extension beyond six years must be justified. Further, any NED serving nine years or more must be re-elected annually. Once a NED is appointed, the NED must inform the chairman before any new appointments are accepted; the board must also be informed.

Remuneration
The Report endorses the current recommendations of the Code that levels of board remuneration should be sufficient to attract and retain directors but should not be more than is necessary. The Report provides more detailed recommendations in relation to the remuneration of NEDs by stating that NED fees should be built up from an annual fee, meeting attendance fees and additional fees for chairmanship of committees and NEDs should have the opportunity to take part of their remuneration in shares but they should not be granted options.

The Indian Scenario
The term "independent Directors" became a part of the Indian corporate lexicon after the publication of the Kumar Mangalam Birla committee report which resulted into introduction of clause 49 in listing agreements. The committee mentioned that 'independent directors' are those directors who apart from receiving directors remuneration do not have any material pecuniary relationship or transaction with the company, its management or its its subsidiaries which in the judgment of the Board may affect their independence of judgment. Clause 49 also prescribes that Audit Committee should comprise of majority of independent directors.

With the integration of the Indian economy into the world economy, -there is consensus among the corporate leaders that the corporate governance in India should conform to international norms. Once Mr. Rosie Catherwood , director of Dewe Rogerson had said that " while Indian companies were rated high on ability, they continued to suffer from low credibility amongst shareholders. He further mentioned that only multinational and public sector units operating in India have been rated highly on management credibility. While MNCs score for the quality of management that they offer, PSUs are rated highly for the transparency of management."

Barring a few exceptions, in India the appointment of independent or non-executive directors has become a matter of mere legal compliance. Most of the companies still function in the same old fashion and the non -executive directors has hardly any say in the management of a company. In most of the companies, hardly any relevant information is passed on to the directors and the meetings of the Board discuss minor and routine matters. The Board meetings are normally held once in three months and that too for 2 to 3 hours only. It is obvious that promoters would prefer to appoint their cronies and faithful persons on their board to have minimum interference of the outside directors.

But a million dollar question begging an answer is that when the Indian businessman will come out of the pond and start swimming in the main stream of global village. How will they satisfy the foreign institutional investors who are demanding greater professionalism in the management of Indian corporate. Even the lending institutions are now giving much more emphasis to good and efficient corporate governance.

It is true that the law alone cannot bring changes and transformation. A judicious mix of regulations and voluntary compliance will play an important role in developing a system of good corporate governance.

Can the Independent Directors really Direct the Company?
The Cadbury Report has observed that 'every public company should be headed by an effective board which can lead and control the business.' The following propositions will highlight the importance of independent and non-executive directors on the board of a company:
1. The non -executive directors, when carefully chosen, can complement the Board's overall strength with their knowledge of best practice outside the company.
2. Their role should not be to do the job of the executive but to act as candid counselors to the guide the company in benchmarking standards and its level of ambition.
3. This is a function not of numbers but caliber.
4. The non-executive directors must concentrate on a few companies rather being involved with up to fifteen companies which the companies act permits.
5. Non-executive directors can bring a broader view to the company. They bring external and wider perspective and independence to the decision making.
6. To render effective services the NEDs should be allowed to seek independent professional advise at the cost of the company.
7. The resume of the NEDs should be made available to the shareholders along with the proposal of their appointment or re-appointment.
8. Non-executive director5s should be given immunity from the responsibility for compliance with procedural matters.
9. The remuneration of the non-executive directors should be commensurate with the time they devote and experience they possess.
10. Non-executive directors who are not qualified professionals (e.g. Chartered Accountants, Companies Secretaries etc.), should undergo proper training before they assume directorships.

Qualities of a director
It is not uncommon that on the Board of directors of a commercial enterprise a retired bureaucrat , a celebrity like a film artist, a retired major general from the army, a retired judge from the High Court or the Supreme Court etc are nominated. There is nothing wrong in this approach per se but one must remember that more often than not these directors prove a decoration on the Christmas tree. In his though provoking book. When one such Major-general, CEO of public sector company, enquired from the other Majors-turned-managers, as to how they found the assignment of building the dam for a hydroelectric project, the answer came- "Those who had spent their entire military career in demolishing dams are now being asked to build one. We were taught to demolish and not to build."

Business has become complex, competitive, risky and challenging. Globalization has made the outcome of a commercial activity unpredictable and uncertain. Today it is not Ford competing with Toyota, its Ford competing with Ford of Europe as has been observed by Tom Peters. At a conference held in Cochin, Abed Hussein, while talking about globalization, said:

"There was a time when the Americans used to say, what is good for the General Motors is good for America and what is good for America is good for general Motors. No longer so. During the Bush period, the Americans gave the slogan, "Be American, Buy American." I have seen those posters. I have seen those handbills. The movement did not last more than 10 days. Men and women came out of their houses and tore those posters and handbills into bits and pieces. The point was that, if the American companies are not able to give me what I want, you can't stop me from buying the goods produced by other countries."

The cardinal sin of management is wrong selection, or a chain or wrong selections. I call it 'cardinal' because it is the most horrendous 'sin' of management. No sin equals it. Factors like caste, creed, color, province, language and blood-relationships are the major factors responsible for the commission of this cardinal blunder. One may imagine that family-controlled (Pedi-type) companies alone suffer from that malady. This is totally incorrect to imaging so. We know, abundantly, about politically-defeated MLA's and MPs being rehabilitated as Chairmen of state and central government undertakings. We all know the results of such appointments: persistent losses, extremely low morale, and flight of high caliber / honest men and women.


Epilogue
The appointment of independent non-executive directors of the Board of a Corporation is not a panacea for all the evils. Nor is the system of corporate governance an innovation like 'Eureka'. However, it would definitely act as a spirited move towards achievement of excellence by the corporate not only in the terms of increased profits and revenue but also in terms of respectability for the laws of the land, protection of interest of shareholders, creditors and employees of the company." Let us not forget that these directors are a part and parcel of our society. We cannot have a better Board of directors than the society itself. A company alone cannot fight the fierce battle of corruption and other social abuses. But collectively, any problem can be tackled and a solution found. The need of the hour is to combat these evils privately as well as publicly. Nothing happens in this world, unless we intend it to happen. Let the stories of good corporate governance be given wide publicity. WE need more and more Azim Premji and Narayana Murthy. The writing on the wall is very clear. Unless ethics are as important to us as economics, fair play as crucial as financial success, morals as vital as market share, we run the risk of being blotted out of our stake holder's landscape.

CONCLUSION

The separation of ownership and control is one of the most ingenious innovations of capitalism. Historically, it allowed geographically dispersed owners, each perhaps with only a fractional interest in the overall enterprise, to pool their resources in an efficient manner. It also greatly reduces the cost of capital by allowing for efficient secondary markets. A key characteristic of those markets is that changes in ownership do not affect the continued viability of the company. The separation also allows owners to place the company's management into the hands of professional managers who, the theory holds, will have the training and specialization needed to run a complex organization. The law imposes on these managers an obligation to act in the best interests of all of the shareholders as a group. Separating ownership from management also limits the influence of the parochial interests of a small group of shareholders, or even a single shareholder.

Separating ownership and control is not, however, without potential problems. Most directly, it gives rise to some very difficult agency issues. Managers who run corporations have a high degree of discretion over shareholder assets, but do not in their role as managers bear the investment risk of making poor decisions. In Las Vegas lingo, they are playing with other people's money. Managers also have at least one very powerful conflict of interest - their own self-interest or greed. As Berle and Means observed in their 1932 classic study of the corporation, "[t]he separation of ownership from control produces a condition where the interests of owner and of ultimate manager may, and often do, diverge . . . ."2 The potential divergence of interests is one of the main reasons the law imposes fiduciary duties on managers to act in the best interest of shareholders, and to scrupulously avoid self-dealing.

From the shareholders' perspective, I think it is fair to say that, even in the current environment, they do not want the responsibility to oversee the company's affairs. If one takes the mutual fund industry as a case study, it appears that even the largest shareholders tend to be passive investors, much more concerned with the return on their investment than how it is generated. Even if shareholders were more interested in governing, the number of shareholders in widely held companies makes it unlikely that they would be effective in making decisions or even overseeing management's conduct.

It is by design that, despite owning the company, shareholders are a relatively weak constituency. Throughout modern corporate history, the law has purposely erected barriers to shareholder participation in corporate management, since such participation, it was thought, would grind the wheels of progress to a screeching halt.

So, if shareholders as a group - whether because of fractional interests or legal barriers - do not have the means to monitor the performance of management, then who is minding the store? That's where all of you come into play. The director's role is to act in the shareholders' place to hire and oversee management's handling of the corporation's affairs. Boards members obviously are far fewer in number than shareholders, which makes it easier to make collective decisions. Unlike shareholders, directors also must act in accordance with fiduciary duties, which limits parochial interests. The Board's position as guardian of shareholder interests is absolutely fundamental to corporate governance because it provides the check on management that helps prevent potential agency problems from becoming actual agency problems.

Given the vital function of the Board, it should not be surprising that Sarbanes-Oxley and other reforms the Commission has proposed focus on - you guessed it! - the board of directors. For the most part, Sarbanes-Oxley and Commission and SRO rules re-affirm the primacy of the Board in overseeing corporate affairs. There are, however, several areas where boards of directors have been seen - to be frank - as abdicating their responsibilities. These include oversight of financial reporting, executive compensation and Board nominations. Some reforms in these areas also seek to affirm the Board's role and enhance its efficiency in carrying out the oversight function. Importantly, others seek in some ways to reduce the Board's role in favor of more direct participation by shareholders. Our reforms in the areas of financial reporting tend to be more on the continuum toward increasing the Board's effectiveness, while our recently proposed Board nomination reforms would tend to give some power back to shareholders.

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