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M & M unveils driverless technology for tractors Tata Motors joins compact SUV bandwagon with Nexon HPCL plans Rs.61,000 crore capex over 5-years Welcome focus to improve rural India... 29 per cent jump in TCS revenues Tata gets 4-star rating for Zest Sivasankaran enters taxi space to take on Uber and Ola Smooth sailing of SAIL A welcome initiative-even critics are recognised ITC chairman calls for policy impetus to transform agriculture L&T profit up by 11 per cent Daimler grows sales and share in India L&T bags the Mumbai Trans-harbour link order TI Cycles plans retail expansion to drive sales for premium bicycles Consolidating leadership position in smartphones Kone India eyes further growth in elevator market Sundram Fasteners rejigs international Nissan exit shouldn’t affect ALL Right to privacy – now it’s fundamental! Land wars Shriram Life clocks more than Rs.1000 crore premium in 2015-16 Tata Motors charts investments in PV and CV businesses ITC – steep excise hike Are they really independent? Solar installations exceed 2015 capacity in five months Bajaj Finserv – Q1: fare well Smartphone onslaught by Chinese brands Tata Steel, ThyssenKrupp sign MoU to merge European units Record two-wheeler sales Gamesa to set up a plant in Nellore AL introduces Guru & Partner Daimler’s truck exports from Chennai cross 5000 units Carnival Films acquiring 3000 screens pan India Housing demand revival L & T set bigger ambitions in defence business Increasing market share TN government keen on revival of operations at Nokia complex Ode to Ratan Tata Hindalco – re-rating He excels in the nuts and bolts of entrepreneurship Wabco launches safety system Back in growth mode Is this a generation gap? Tata Motors bets on new launches Maruti – for young buyers CAPITAL NOTES LVB posts 31 per cent growth in Q1 net profit Preparing for the next growth curve TVS Srichakra plans capacity expansion Michelin to double Chennai capacity Yamaha unveils scooter boutique Eyes strong growth in 2016-17 Toyota and Suzuki to introduce EVs in India by 2020 Hyundai India achieves 7 mn production at Chennai factory V-Guard launches app-enabled water heater system The unexpected exit Mercedes-Benz sales continue to zoom AL wins Deming prize again PSU non-life firms seek to protect share Chinese smart phones flourish in small towns too! New India Assurance posts impressive show It takes two to tango L & T’s floating dock for navy Forging industry worried over lower supply of steel and its price When small is not so beautiful… IOB on turnaround path Vellayan is back, after 150 days Rane targets Rs.5500 crore topline by 2018-19 AL secures orders for 3600 buses Aurobindo Pharmacy: good turnaround A niche in FMCG business... Titan Company – sales recovery to kick in Emami – a new growth mantra TVS Automobile invests Rs.75 crore in start-up firms E.I.D Parry (India) Ltd: another sweet year Last stages Dish TV – subscriber additions encouraging RoC in the dock... Singur minus Nano – victory or folly? The gainers and the losers Ponni Sugars (Erode) Ltd: not so sweet 2012-13 Tata Motors aims to be among the Top 3 global CV & PV firm PPP model for infrastructure development Hyundai to focus on SUVs and AMT variants From the toughest to the best year
 
Are they really independent?
The idea of the independent directors is simple. They are expected to be independent from the management and act as the trustees of shareholders. This implies that they are obligated to question the conduct of organisations on relevant issues.

For India 2009 is of great significance with respect to independent directors. More than 600 independent directors resigned that year.  Two events triggered the exodus. One, Nimesh Kampani, the independent director of Nagarjuna Finance, faced the regulators’ wrath for the company’s inability to return money to the depositors. Also that year the Satyam fiasco happened and on its Board that time was, among others, Krishna Palepu and Vinod Dham. The former was a Harvard Professor and the latter was the man who gave Pentium processors to the world. Satyam investors lost more than Rs. 13,000 cr. The investors blamed the independent directors and auditors.    

The ghost of 2009 is back to haunt the independent directors. These directors of Satyam have been fined for not being able to protect the interest of the shareholders in the Satyam fraud. The illustrious professor Krishna Palepu has been fined more than Rs. 2.5 crore for having conflict of interest, as he was also a paid strategic advisor for the company. Further, other independent directors have been fined Rs 20,000 each. This is a landmark judgment, as the role of independent directors would now invite higher degree of supervision. The point of discussion here is: are the independent directors in a position to deliver?

 

The ‘agency’ problem...

Traditional finance states the main objective of an organisation is to maximise the wealth of investors. However, the managers who run the organisation and the people who invest are not always the same. Thus, there is a possibility of conflict of interest between the investors and the managers. Further, the salaries of top executives are often linked to the profits of the company. Thus manager gains by maximising company’s profits in short run rather than maximise wealth.  This is called the agency problem.

The independent directors are appointed to protect the interest of the shareholders and hence their main efforts should be directed to reduce agency problems.  However, independent directors do not seem to be in position to do so. In a seminal paper Understanding Enron: It’s About the Gatekeepers, Stupid” John Coffee Jr has pointed out that the independent directors generally fail to protect the interest of the shareholders. Further, in the book ‘Barbarians at the Gate’ the authors have shown how independent directors are given consultancy projects to get them to ignore excessive perks and salaries of top executives. So why do independent directors fail? Can the directors really do something if they are inclined to protect the interest of the shareholders?


Independent directors’ view …

In 2009, the regulations for independent directors and the power of directors were grey areas. Even though it was mandatory for every company to have an independent director, no one was sure what the role of this director was. Readers would be surprised to know that most of the independent directors who were interviewed by researchers Vikramaditya Khanna and Shaun J Matthew in 2010 for their research paper ‘The Role of independent directors in controlled firms in India: Preliminary Interview Evidencer,’ viewed their role to be that of strategic consultants rather than whistle blowers. The blame cannot be fixed on the independent directors for the same. As discussions held in board meetings were subject to confidentiality clause, one independent board of director could not do much single-handed. He could not effectively act as a whistle blower.

Things have changed from 2009. According to the new Companies Act, the majority of directors in committees such as audit committee and nomination and remuneration committee, should be independent directors.  The regulations have now become tighter. The number of meetings has increased and so has the involvement of the independent director. However, experts still believe it is not possible for independent directors to protect the interest of shareholders.

 

Practical difficulties...

It is common knowledge that the promoter has the final say in the appointment of independent directors. Then how does one expect the independent directors to act without being influenced? The role of independent director in itself is paradoxical, as he independently needs to monitor the activities of individuals who appoint him. With resignation being the only effective tool in the hand of the directors such punitive action as doled by the Hyderabad court would only deter individuals of repute from taking the role of independent directors. Gatekeepers should be gatekeepers and given the weapons needed in the form of regulatory support to protect them.

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