Mortality of independent directors

Independent Director is an important character inside any listed company’s boardroom and in some of the well-governed companies. Few decades back the independent director used to be hand picked personally by the CEO and the name was recommended by the CEO to the Board and the seat for the independent director inside boardroom used to be allocated next to the CEO. This role of an independent director in the last two decade has slowly graduated from being a CEO’s best friend, a trusted lieutenant who would do anything for the CEO, to a watchdog, a CEO’s good friend trying to guard the interest of shareholders and then to a bloodhound, a CEO’s friend who started questioning the CEO for his behavior and decisions inside boardroom.

In the 90’s the selection of independent director was not very critical as the appointee was CEO’s best friend, every person inside the boardroom knew he could do no harm. This selection became a little better in the 21st century and a diligence was done on the pedigree of the person who had to be appointed as his role changed from that of glamour to guarding the shareholders wealth and thus the choice was limited to ensure that the appointee is loyal to the Board yet performs the role of a guardian. With changing times the choice of identifying the friend inside boardroom became stiffer and tougher as this appointee was required to question the CEO and the Board, and protect the larger interest of stakeholders and thus from being a best friend to a friend the roles changed and as the roles and functions changed the regulator started to intervene.

The regulator has now fixed a lifeline for independent directors and listed out their roles, responsibilities and duties. The independent director thought that his position was immortal, at least till such time he was alive, but the regulator decided to fix a time line or a lifeline of 10 years and the immortal position suddenly has become mortal.

Till 2014 the independent director was in support of the theory, “men may come, men may go, but Independent Director shall hold office forever”. The independent directors proved this theory right, until recently an independent director from a large IT company that was once rated well for corporate governance practices, in which he was holding this position since 2000 decided to quit. It was astonishing to note that even the promoters of this company had left, but there were no signs of the independent director quitting. Unfortunately, his tenure had to come to an end with the law implementing some strict corporate governance standards and he was forced to resign as Independent Director.

There seemed to be no signs of these independent directors resigning or retiring from the companies until the Companies Act 2013 & SEBI introduced the concept of “mortality for Independent Directors”. Many good companies that were very high on corporate Governance used to treat Independent Directors as immortals who would continue with their job till the company was wound up or such time the independent director would wind up, whichever was later. Sadly, the exit for independent directors seem to be by force and not by choice on account of the restriction imposed by the regulators to hold office only for a maximum two terms of 5 years each. This has resulted in mortality to the term of immortality for the tenure of independent directors.