Parekh raises concern over independent directors

The paucity of competent independent directors is a major hurdle for boards as also choosing independent directors...

Written by ENS Economic Bureau | Mumbai | Published: January 22, 2009 3:14 am

The paucity of competent independent directors is a major hurdle for boards as also choosing independent directors with appropriate skill sets and knowledge of the business,said Deepak Parekh,chairman of HDFC and a director of fraud-hit Satyam Computer.

“The bane of corporate governance in India has always been the selection of independent directors. Although Clause 49 stipulates that 50 per cent of directors of a listed company need to be independent in case of an executive chairman and 33 per cent in case of a non-executive chairman,finding truly independent and qualified directors is a serious problem in India,” he said at a CII seminar on corporate governance in Mumbai.

“This has often led to choosing the known devil,but it limits the skill set of the board. On the other hand,independent directors also get stressed by serving on too many boards and are often unable to do complete justice to their roles,” Parekh said. Given the scarcity in board talent,there is a need to plan vacancies well in advance — reviewing and confirming the desired expertise and qualifications of new directors,identifying potential candidates and communicating the board’s interest,he said.

According to him,it is important to stress that the search for independent directors needs to be an ongoing process and not just a one-off exercise to fill up vacancies. “The nominating committee needs to constantly assess the present skill sets of the board and should be able to identify areas where skills are lacking. No doubt this may be a frustrating task of what is called the ‘impossible director search’ but the processes urgently need to be put in place,” he said.

“Most succession planning efforts are directed at the CEO and many independent directors tend to forget succession planning for themselves,” Parekh said. He also stressed on the the importance of inculcating a process that facilitates board evaluation. “A board evaluation is not a one-size-fits-all proposition,but needs to be customised and tuned into the culture of the organisation. The key objective of a board evaluation is to check if the board is on track and seek opportunities for change,which would enable the board to be more productive,” he said.

In countries such as the US and the UK,listed companies are mandatorily required to conduct board evaluations annually,while in India,board appraisals are voluntary and perhaps this is the reason why the concept is still in its infancy. “Surveys show that only one in five companies appraise the board’s performance in India,” he said.

Parekh said many boards in the recent period have gone through a period of crisis. “A number of recent events unfolding have highlighted the importance of external auditors meeting the audit committee,independent of management. Mere reliance on external auditors may not be sufficient and internal auditors must have regular access to the audit committee,” he said.

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