It has been emphasised at various times that the flaw in the present system of recruiting independent directors is not so much the quality and credentials of the persons chosen for this position, but that the candidate is often someone known to the promoter of—or a key functionary in—the company, thereby impairing the ability to be truly independent.
Since the persons appointed possess the right credentials and qualifications, they may seldom lack the functional and intellectual ability to add value in any board discussion and provide good advice.
However, the crunch comes when conflicts of interest arise, where the promoter or the management engages in some questionable or an unethical transaction, the director concerned fails to question and probe adequately, laboring under a mistaken sense of trust in the person, or feeling queasy to question someone, a longtime friend, a golf buddy or the like!
This proximity to the chairman or the top honcho whose decision prevails finally in such selection of the director compromises the independence of the process and the outcome.
It is difficult to know of cases where someone considered for appointment for the post failed to make it or was rejected, as this process is informal and unofficial where the person considered is spoken to beforehand and the name is put up when final and conclusive, to the nomination and remuneration committee (NRC) first, and the board, next.
Barring some elusive examples, the NRC or the board will seldom reject a case put up, as the candidate has already passed the test of acceptance and being a friend of the promoter.
When the gentleman informed me that he had an informal invitation from ESAB India Ltd to be considered for the position of independent director (ID), I congratulated him that such an invitation meant a sure selection.
The process he went through, as narrated by him, sounded slightly unusual.
He was initially met by the chief financial officer (CFO) of the company. His experience and credentials were combed through. Later, the company secretary held a discussion with him.
Next, the managing director (MD) of the company, Rohit Gambhir, met him, not casually, but for a detailed discussion.
Finally, he met with the three independent directors of the company, being the chairs of the audit and the nomination committees, again, not a mere formality but for a substantive discussion.
He did not feel put off by the many layers of discussions and, on the contrary, was highly appreciative of their system that is salutary and different than a promoter making the decision and selecting.
He also felt that the meeting with the MD and the other directors pivoted on such topics that he got a near conclusive impression of his selection. His professional credentials and the positions that he holds presently in a few companies would easily justify that confidence.
Yet, for a long time there was silence. Out of curiosity, and to understand the approach of the company from a third-party angle, I attempted to reach out to the CFO and one of the directors, but did not pursue further when the response was tepid. Also, a persistence to find out can be misconstrued as canvassing or influencing.
Till date, there has been no official feedback to him from ESAB on this. However, the company has filled the position recently, as per information in the public domain.
The chagrin of the person in not getting a response and reasons as to why the company did not go ahead with the appointment in his case caused me to write this.
In effect, the grouse is the lack of courtesy of communication and acknowledgement of the time spent by the individual to go through the four-tier process, and has nothing to do with the outcome.
The multistage process is not common among companies and many director candidates may even squirm at being interviewed at different levels in the organisation.
A courtesy meeting with some key functionaries to assess mutual comfort may be in order, but not a typical recruitment like interviews.
There is a definite need to look afresh at this subject from the regulator’s angle. The system of independent directors as currently understood has come into force since the year 2014.
The first cycle of 10 years is over. Many who served as independent directors till date were actually on boards of the companies for decades. The independence qualification was counted only from 2014! (honestly, no pun is intended in the previous sentence.)
This, of course, is now history and nobody can serve in the capacity of an independent director beyond 10 years. As affirmed earlier, there is no debate about the quality and the qualifications of the persons selected for this position.
How should independence be ensured in the selection? Many feel that independence is an elevated state of consciousness, like that of a genuine monk, and cannot be attained by merely tweaking the recruitment and selection process.
With the Kumbh in full flow, and many having dipped themselves in the holy water, the monk-like state may be more freely going around! But, the regulator has also a duty to revisit the performance of this position given the plethora of scams that have occurred post the implementation of this.
It is difficult to find any company with a clear policy on the process of recruitment. Companies like Reliance Industries Ltd (RIL) have a policy on this but it mostly repeats what is contained in the law. There is no well-articulated approach to the identification or the process of selection.
Many thousands have registered themselves on the ID portal and are bemused how their existence will be taken note of by companies that appoint IDs! The common grievance is that mostly persons who are in multiple boards already are being sought after.
The unemployment problem in the country extends beyond the common person on the street, and to such exalted positions as well!
There is a felt need for SEBI to set out some good practices on this topic rather than bring in more legislation.
The secretarial audit should be enhanced to look at such matters and opine qualitatively than be a mere compilation of procedures and data that constitutes the audit report presently.
Whether a company has a robust identification process than going by word of mouth references and if the NRC and the board look at multiple candidates before choosing one, should be vouched by the audit.
Companies like ESAB, with already a headhunting approach than choosing known faces, should put in place the mechanism to close the loop and, if possible, set the expectations well at the start and through the multilayered discussions.
Aren’t electrodes used to weld objects and bring them closer?
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as senior advisor post-retirement handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
Mr Warren Buffett does not invest in Danaher , although it ticks many boxes..they have few companies in India as well..so read between the lines why he does not invest..