Big pay may make directors dependent

Even as companies are looking for independent directors, Sebi chief Damodaran has said that companies should not over-compensate or pay too little to these directors. Independent directors must constitute up to 50% of the board seats by the end of the year.

According to Damodaran, companies will have to take a call on how to compensate independent directors. “Too little compensation will not attract the right people but with too much compensation the director will not be independent. Each company will have to ask itself how much is too much. Companies should not over-compensate directors because along the way directors will lose their independence,” he said.

Damodaran was speaking at a conference on corporate governance. The Sebi chief did not agree with the contention that there are not enough people to become independent directors. “In a country as populated as ours is, and as well-informed, it is not difficult to find a few thousand such people.”

All listed companies are required to comply with the listing agreement by December 31, which mandates that 50% of the board must comprise independent directors. There are around 9,000 listed companies and estimates put the requirement for independent directors at over 30,000.

Damodaran also said that the time gap between two board meetings will now be increased to a maximum of four months. Earlier, the maximum time between two board meetings was three months and the minimum number of meetings to be held was four a year.

KV Kamath, MD & CEO, ICICI Bank, raised the issue of companies concentrating on quarterly numbers. “Companies will have to look at the long-term future in a sustainable way. Are quarterly numbers disturbing us from the long-term view? With enormous pressures on each quarter are you losing long-term focus?” he asked.
Companies have to invest in the future. These investments would impact their current standing. A decision has to be taken whether one will articulate this and talk about it. This will be a challenge which companies will face as one goes along.”

Kamath also added that the board of directors is central to the governance framework. The role of the board has grown enormously. There should be constructive tension between independent and management directors. The board needs to support and challenge the management.

He also pointed out that corporate governance cannot be done through a ‘tick-box’ approach.

Kamath said that there has been an increased focus on governance because of corporate scandals which have been wake-up calls to the companies, government, regulators and others. However, even as the government and the regulators have taken the lead, the response by companies has not been up to the mark. Companies, by and large, would be happy with the check-box type approach. Companies must understand the benefits of corporate governance.