Independent directors


In a wonderful piece today, Prof Raghunathan argues that the concept of independent directors is an oxymoron.  And, that given their current state of involvement in the company, it isn’t reasonable to hold them accountable for the performance of the company

The very term independent director is a laugh! You can either be independent or a director ; rarely both!…many independent directors open their mouths in the meetings only to pop in a cashew…

When an independent director acts truly independent on a board, his infamy spreads fast, and not only is he out after his first term, he also finds himself unwelcome in other boards as well. So Darwinian adverse selection has mostly rooted out that breed already. Thus, if you are an independent director , chances are you are either a yes man, or a kin of the promoters, or a one far too busy in your empire to care much about what’s happening on one of the many boards sit on, or one who has self actualised because you are in a board room!

Thus, it is true that most independent directors will have little clue on what’s going on in a company. To hold such souls responsible for the affairs of the companies seems unfair.

Full text here

It’s a complex issue though.  You could argue that an Independent Director who toes the line, actually does a disservice to the shareholders and therefore must be held accountable.  Carter and Lorsch have argued that the core issue is with how board selections and operations are managed

 

Outsiders who are genuinely independent find themselves at an enormous information disadvantage.  Paradoxically, the more independent the board, the more it must rely on management for information about the business. 

 The average U.S. director spends only about 100 hours per year on the job. (European directors spend even less time.) So how to ensure that independent doesn’t just mean ignorant?

Sadly this is true for many Indian boards too.  Prof Raghunathan proposes one solution – an independent rating of boards by a credit rating kind of agency.  But I think the real awakening has to come from within.

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