Improving corporate governance: Making independent directors really independent

Masih Malik Chowdhury | Published: June 06, 2018 21:53:07 | Updated: June 09, 2018 20:19:57

An independent director is quite often termed an outside director. He is a member of the Board of Directors (BoD) who does not have a material or pecuniary relationship with the company or related persons, except sitting on board meetings and getting fees. In USA, independent directors constitute 66 per cent of all boards and 72 per cent of S&P 500 company boards (The Wall Street Journal).

"No director qualifies as 'independent' unless the board of directors affirmatively determines that the director has 'no material relationship' with the listed company, either directly or as a partner, shareholder or officer of an organization that has a relationship with the company" the New York Stock Exchange Standards stipulate. Nasdaq's rules say, an independent director must not be an officer or employee of the company, or its subsidiaries, or any other individual having a relationship that, in the opinion of the company's board of directors, would interfere with the exercise of independent judgement in carrying out the responsibilities of a director.

In Bangladesh, the Companies Act 2013 has made a provision for Independent Director (ID). Section 85 deals with the Appointment or Removal of Directors. Section 85(5) describes the Independent Director and his qualification. The subsection 85 [ Ka, Kha (O, Ao) Ga, Gha, Umo (Aa)] spells out in detail about the qualifications of Independent Directors. An independent director is to comply with the rules of schedule (IV) of the Act, Section 85(7). Subsection 85(8) states that any ID will only take meeting fee and allowances along with the approved commission etc. ID will not get any other remuneration whatsoever from the company.

An ID will remain in position for a 3-year term only. However, BoD of the company concerned can recommend renewal of contract for another 3-year term. No ID will retain the position in BoD for more than two consecutive terms. But after the lapse of three years following two consecutive terms, an ID can be reappointed by the BoD. ID can not be involved, directly or indirectly, with any other business of the company and cannot indulge in any activity of the company. Section 85 (II) mentions about the accountability of ID and also of the situation when the ID knowingly gets involved in company affairs beyond his jurisdiction.

The new provision for ID in the Companies Act depict the importance of ID in a BoD. Over time, the Companies Act 1913, the Companies Act 1994 and the Companies Act 2013 have reflected the changes in global businesses and appropriate reforms have been brought about accordingly. The issue of governance has become vitally important. Indeed, it is more of a central issue in the management of publicly listed and other companies.

The guidelines on corporate governance of Bangladesh Securities & Exchange Commission (BSEC) also elaborate about ID. It states that - all companies shall encourage effective representation of independent directors on their Board of Directors. At least one-fifth of the total number of directors in a company's board shall be independent directors. Such ID will either not hold any share in the company or hold less than 1.0 per cent shares of the total paid-up capital of the company. S/he will not be a sponsor of the company and should not be connected with any sponsor or director or shareholder of the company based on family relationship. His/her family members also should not hold such shares in the company and must not have any other relationship, whether pecuniary or otherwise, with the company or its subsidiary/associated companies. An ID must not be a member, director or officer of any stock exchange and should be one who is not a shareholder, director or officer of any stock exchange or any intermediary of the capital market. An ID must not be a partner or executive or should not be a partner or executive of the concerned company's statutory audit firm during the preceding three years. S/he should not be an independent director in more than three listed companies, and must not have been convicted by a court of competent jurisdiction as a defaulter in respect of payment of any loan to a bank or a Non-bank Financial Institution (NBFI). An ID must not be convicted for a criminal offence involving moral turpitude.

Are the IDs really independent? It has been and is still a question omnipresent in the governance arena. Many IDs are the subject of appointment by BoDs, which are dominated mostly by promoters as they hold majority shares. So, when the IDs demonstrate too much independence, renewals of their tenure in BoD are often jeopardised. Consequently, IDs are hardly independent in reality. It is indeed difficult for an ID to remain truly independent, while a renewal is dependent on the BoD.

Also, properly qualified IDs can give hardly enough time for company matters, as the meagre meeting fees rarely allows them to work with due diligence. In fact, dearth of capable people in the market for ID positions is a great limitation for choosing alternatives to incumbent IDs. Again, An ID may be asset for a company, but at the same time, may be a liability for the Top Management.

Too much independence exerted by IDs in company matters may defeat the very purpose of the concept, or for that matter, the spirit of ID. Rationally speaking, independence of IDs is a theoretical matter as they are appointed by the BoDs. Most likely, the IDs move ahead by getting attuned with the BoD demands, without which they cannot survive. This contradicts the very spirit based on which the Independent Directors are appointed. However, if over 50 per cent of BoD members were IDs, then real good governance could replace the persistent poor management and bad governance observed in the concerned companies.

The Tata-Mistry fiasco in India brought to focus the need for reassessment of the institution of independent directors and the role they should play in ensuring effective corporate governance.

Though independent directors are often expected to protect the interests of minority shareholders, their foremost duty is to act for the benefit of the company as a whole. And that would benefit the shareholders - be they minority or a majority. The independent director holds a special place in the system of governance of a company, its board and its management. S/he is required to exercise proper judgement on corporate affairs objectively. This role is especially critical when there is a divergence of opinion between the shareholders, the company and its management.

The 2013 Companies Act sought to bring about better corporate governance through provisions that facilitated increased transparency, accountability and professionalism in BoD. The BSEC has been and is still in the forefront of the efforts to improve corporate governance through its pivotal role. Time is ripe for making efforts for its successful implementation.

Masih Malik Chowdhury, an FCS & FCA, is Managing Partner of Masih Muhith Haque & Co., Chartered Accountants, and a Past President of ICAB.

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