Challenges for Independent Directors
Last few weeks have brought into sharp focus the role, responsibility and performance of Independent Directors on boards of Indian companies, especially the TATA Group. With clear division in the rank and file of the boards of different TATA Business firms, the spotlight is firmly on the understanding and definition of the term “Independence”.
The Companies Act 2013 as well as the SEBI Listing guidelines, have laid down specific criteria on who qualifies as Independent Director and generic definition of their fiduciary duties. While these are operative guidelines, and boards are expected to comply with these, the broader question is, how can one understand the intended role of Independent Directors. Most of the media coverage as well as exposure, since the board events at TATA Business firms started playing out, has been on trying to decipher the stated guidelines and decisions made by different sections of Independent Directors at the various operating firms. While the jury is still out on which side seems to be enjoying an upper hand in the high stakes of boardroom control, what has added to the mix has been the diverse interpretations and actions that have been executed at various boards of the operating firms. Clearly it appears that there is no one unanimous view/ interpretation on the role of Independent Directors with each version seemingly giving an articulated response for its stated position. And therein lies the difficulty – The “Independence Dilemma”.
To understand this dilemma or lack of clarity on what constitutes the duties of Independent Directors, we need to first comprehend their intended role as well as associated responsibilities. An Independent Director is someone who acts in trusteeship on account of every stakeholder in general and no one in particular. Most importantly, Independent Directors should not be seen to represent any specific constituent of stakeholder community. This means maintaining reasonable, sufficient and equal distance from every interested party connected with the enterprise while evaluating all information to arrive at considered, nuanced and informed decisions. In the process, ensure actions are taken without fear or favour to display equanimity and non-partisanship in orientation and approach.
Given this nuanced role, what therefore are the issues that the Independent Directors should be concerned with? Should they be restricting themselves only to discharge duties around strategy, performance management, business financials or should they go beyond the operational issues and task themselves with bigger challenges that confront institutions – defining distinctive identity, establishing institutional culture, create enduring business architecture, establish leadership depth and succession, managing forces of disruption and brand / reputation management amongst other key matters. It would appear that the present state of affairs at TATA Business firms have been the absence of an articulated role for Independent Directors that goes beyond mere compliance. And this issue is not limited to TATA Group alone. It just finds itself injected into public glare and intense scrutiny given the recent happenings at TATA Sons. Had the Board at these firms been seized of the more critical matters that deserve highest priorities, the present set of issues may not even have cropped up. These are matters that essentially define the soul of an enterprise. Without leadership attention on issues that define the culture and inner workings (spirit) of an enterprise, any performance measure will be short lived and the enterprise eventually will lose its way in the mindless quest for numbers. What brings sanity to numbers is an unquestioned leadership belief in bringing meaning to institutions’ pursuits.
Independent Directors, more than any other class of stakeholder representative, have a fiduciary responsibility to provide stewardship of the highest standard to an enterprise. Being independent, they have the necessary courage and motivation to focus boardroom agenda on long term value creation goals. They need to leverage this unique position to drive through institutional models that are timeless in their impact and relevance. It is in helping design an institutional identity and vibrant business architecture of enterprise that they ensure a firm’s autonomy while securing its long term economic objectives.
Lessons from the TATA Sons episode clearly highlight that it is not enough to just comply with stated regulatory guidelines – time has come wherein Independent Directors become more assertive in discharging their duties and move towards deeper institutional commitments. This calls for recalibration of orientation and mindsets on how an Independent Director role is viewed, both inside and outside the boardroom. What is required is to bring transformation inside the boardroom that looks to establish institutional supremacy over ownership representation – whether major or minor. It is only when decisions get formulated beyond the limitations of a select group, can there be long term sustenance of an enterprise that looks over and above special interests.
We would therefore all do well to remember that the role of Independent Directors is not a “good to have” showpiece but can be the very difference between enduring prosperity and short lived promises. Advantaged would be the boards that empower their Independent Directors in taking proactive, bold and forward looking roles that goes beyond the limited defines of law. This means having faith, conviction and confidence in Independent Directors to take on the role of sentinels by becoming guardians of an institution’s rich legacy and inspiring spirit. It is only by safeguarding the soul of an institution that they protect its legacy and honour its traditions – Things that give a unique sense of identity and purpose to establish and secure its relevance across the shifting sands of time.