Tuesday, April 14, 2009
Indepedent directors are of no use in todays board
As we can see successful buyout of Satyam by Tech Mahindra,let us discuss the role of independent directors in today's board. Was it because of the directors who made the 3rd largest Indian IT company to be taken over by a company of its lower rank or was it a single person ball game. Discuss what went wrong in Satyam and things which shuld b learnt by directors from this issue.
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Majority of Big corporates are more like family owned business where few individuals dominate the proceedings. Naturally they serve their own vested interests without bothering much about the company.
ReplyDeleteIndepedent directors are ones who are suppose to protect shareholders interest.
They have a many powers to influence company's decisions & policies.
But after these incidences, one doubts do they have any power or they are just mute spectator.
First we will take a look on what is an independent director?
ReplyDeleteIndependent directors are those who, apart from receiving a director's remuneration, do not have any material relationship with the company or its subsidiaries. the independent directors are present on behalf of shareholders & investors to protect their interest .there are two duties of I.D.’s
1. loyalty to the shareholders
2. taking utmost care in approving any proposals of the management of a firm.
An I.D. interfaces with shareholders through audit committee reports. But their scope is restricted to numbers & maintenance of account books.
In India, study done in 2007 by AT Kearney, AZB & Partners and Hunt Partners showed that only 39% of companies in India followed a formal process for the selection of board directors. The study showed that in 2005-06, less than a third of the companies even bothered to appoint new faces as non-executive directors. As much as 90% of independent directors were selected from personal networks of companies’ CEOs or chairpersons.
As per the law, an independent director should be appointed by the shareholders.
However, in practice, the independent directors are nominated by the promoters and existing board of directors while the shareholders merely accept the nomination. In other words, this makes it possible for promoters of a company to nominate people known to them and persuade the shareholders to accept the nomination. As a result, most independent directors lose their "independence" and end up being mere cronies in the boardroom game.
And, Satyam could be cited as an infamous example where the independent directors have spoken on behalf of the promoters, instead of speaking on behalf of the companies.
the Satyam board comprised of illustrious names like. Dr. (Mrs.) Mangalam Srinivasan (a management consultant and a visiting professor at several US universities including University of California at Berkeley, American University in Washington DC, Harvard University, Northeastern University and Tufts University in Boston), Vinod Dham (former vice president of Intel's Microprocessor Products group and currently the founder-executive managing partner of NEA-Indo US Ventures) and Prof. M. Rammohan Rao (dean of Indian School of Business or ISB), Prof. Krishna Palepu of the Harvard Business School (HBS), Prof. V.S. Raju (former director of two IITs) and T.R. Prasad (former Union Cabinet Secretary).
However, not a single independent director blew the whistle when Raju attempted to acquire Maytas. They not only failed to guide the board on critical issues like blocking the controversial Maytas deal but also failed to protect the interest of the shareholders by turning a blind eye to Raju's wrong-doings that were being committed brazenly over several years.
Here on above basis, the presence of independent directors can be questioned.
First we will take a look on what is an independent director?
ReplyDeleteIndependent directors are those who, apart from receiving a director's remuneration, do not have any material relationship with the company or its subsidiaries. the independent directors are present on behalf of shareholders & investors to protect their interest .there are two duties of I.D.’s
1. loyalty to the shareholders
2. taking utmost care in approving any proposals of the management of a firm.
An I.D. interfaces with shareholders through audit committee reports. But their scope is restricted to numbers & maintenance of account books.
In India, study done in 2007 by AT Kearney, AZB & Partners and Hunt Partners showed that only 39% of companies in India followed a formal process for the selection of board directors. The study showed that in 2005-06, less than a third of the companies even bothered to appoint new faces as non-executive directors. As much as 90% of independent directors were selected from personal networks of companies’ CEOs or chairpersons.
As per the law, an independent director should be appointed by the shareholders.
However, in practice, the independent directors are nominated by the promoters and existing board of directors while the shareholders merely accept the nomination. In other words, this makes it possible for promoters of a company to nominate people known to them and persuade the shareholders to accept the nomination. As a result, most independent directors lose their "independence" and end up being mere cronies in the boardroom game.
And, Satyam could be cited as an infamous example where the independent directors have spoken on behalf of the promoters, instead of speaking on behalf of the companies.
the Satyam board comprised of illustrious names like. Dr. (Mrs.) Mangalam Srinivasan (a management consultant and a visiting professor at several US universities including University of California at Berkeley, American University in Washington DC, Harvard University, Northeastern University and Tufts University in Boston), Vinod Dham (former vice president of Intel's Microprocessor Products group and currently the founder-executive managing partner of NEA-Indo US Ventures) and Prof. M. Rammohan Rao (dean of Indian School of Business or ISB), Prof. Krishna Palepu of the Harvard Business School (HBS), Prof. V.S. Raju (former director of two IITs) and T.R. Prasad (former Union Cabinet Secretary).
However, not a single independent director blew the whistle when Raju attempted to acquire Maytas. They not only failed to guide the board on critical issues like blocking the controversial Maytas deal but also failed to protect the interest of the shareholders by turning a blind eye to Raju's wrong-doings that were being committed brazenly over several years.
Here on above basis, the presence of independent directors can be questioned
Exactly what nikhil has post is INDEPENDENT DIRECTOR. Apart form tht, the purpose of identifying and appointing independent directors is to ensure that the board includes directors who can effectively exercise their best judgment for the exclusive benefit of the Company, judgment that is not clouded by real or perceived conflicts of interest.
ReplyDeleteIndependent Director shall periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint. one of the most important role of independent director is to Satisfy investor and workers that financial information is accurate and ensure that robust risk management is in place.
But in case of satyam, this is in reverse matter. they inflated Account books for illegal gains.
Now first let us understand that who is an indepentdent director and what are its duties. Independent directors are those who have the Independence of judgement, no material relationship, no pecuniary
ReplyDeleterelationship.Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgement of the board may affect their independence of judgement. He is one of the members of the board and he also has the right to give his opinion and take few decisions. Actually as we have seen what is the requirement of the independent director i think that the company would need the independent director as he will be their in the difficult situations of the company to standby. he will be able to deal with the conflicts between the manager and the sahreholder. He would be the middleman and as well as the supporter of the company who can take few important decisions about the company. But as we all know about the satyam scam my suggesion would be quesioned but what R Raju the former director of Styam has done, it is not necssary that every director would do. In order to avoid such things the director should be given limited responsibilities and his work should be kept under watch by government people which can be more than useful. In case of satyam Raju was given the freedom thas why he misused. Government should bring in new laws to the company to stop such things and bring it under control.
I conclude