https://www.thehindubusinessline.com/2005/07/01/stories/2005070100300900.htm
Financial Daily from THE HINDU group of publications
Friday, Jul 01, 2005 |
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Non-executive directors in their twilight years
D. Murali
THE Tatas have added five more years to the retirement age of non-executive directors. But if you wonder who a non-executive director or NED is, you may not find a definition in the Companies Act.
The legendary Ramaiya's Guide points to Section 291, which is on `general powers of Board'. The book cites Palmer's Company Law - that "the practice of appointing non-executive directors, also known as part-time, outside or independent directors, is growing, particularly in public limited companies". An old world view, that is, because the in thing now is not non-exec but `independent' director, the cynosure of both the SEBI and the Irani Committee.
The Act defines `director' as "any person occupying the position of director, by whatever name called". There is no objection to the adoption by companies of the American nomenclature of President and Vice-President for designating their managerial personnel, notes a clarification from the Department of Company Affairs, cautioning Registrars to be watchful of companies adopting new nomenclature.
We know that directors come in all shapes and sizes. For instance, managing director, as Section 2(26) is a one who is entrusted with substantial powers of management. To explain the substance in `substantial powers' a proviso to the section notes that routine administrative acts such as affixing the common seal of the company to any document or signing share certificates "shall not be deemed to be included".
If interested, you may read up on interested directors, nominee directors, and alternate directors; and if you're not tired out, take note that retiring directors are those retiring by rotation.
Executive director or ED is a common post in many organisations, but you may not find a definition for the phrase in the big law tome. He is "a person responsible for the administration of a business," accordingwww.thefreedictionary.com.
Stanislaus Council of Governments (www.stancog.org) has a four-page job descripttion for its ED.
As the opposite of executive director, the NED is a person not burdened with the responsibility of administering a business. He is "a director of a company who is not employed full-time by the company, but brought is in as an advisor," sayswww.allwords.com.
NED thus works part-time, compared with the whole-time director or WTD. While the WTD is wedded to the company, devoting all of his time and attention to the company's affairs, NED is not so shackled.
WTD is virtually an MD, according to a Department clarification. He cannot be an employee of another company or elsewhere, or be engaged in any other business pursuit, though he may be an ordinary director of one or more other companies also, as Ramaiya explains under Section 267.
Though the corporate form of organisation is founded on lofty principles such as joint ownership, perpetual existence, limited liability and so on, examples of corporate clothing donned by powerful individuals are neither rare nor new. Thus, the search for the first NED may after all lead us to yesteryear mommy-daddy-companies with one of the two playing a non-executive role.
Traditionally, the need for NEDs is explained as as the urge to tap the expertise of outsiders while keeping them free from the day-to-day problem of running the business, but, in practice, don't be surprised if you find NEDs only making the numbers for the quorum and nodding when not asleep, after their own needs have been satisfied in the form of a hefty sitting fee and so forth.
On an NED's duty, there is an instructive UK case Dorchester Finance Co Ltd vs Stebbing. There, two NEDs signed off blank cheques and allowed the ED to fill up. The court reminded them that a director was required to perform his duties with a degree of skill as may reasonably be expected from a person with his knowledge and experience, to take such care as an ordinary person might be expected to take on his own behalf, and to exercise any power vested in him in good faith and in the interests of the company. In applying these standards, there is no distinction between executive and non-executive directors, said the court.
Corporate governance for UK listed companies has come a long way since in 1992 Sir Adrian Cadbury issued his committee's report `The Financial Aspects of Corporate Governance', opines www.pkf.co.uk in a piece titled, `Whither the non-executive?' The major thrust of the Cadbury Report was to empower non-executive directors through the creation of audit and remuneration committees, to encourage the obtaining of independent advice and to separate the role of Chairman from Chief Executive, it adds.
Section 292A, which came into our statute books from the year 2000, speaks of an audit committee consisting of not less than three directors; two-thirds of the total should be directors other than MD or WTD.
Not long ago, Derek Higgs reviewed (after Greenbury and Hampel reviews) the role and effectiveness of non-executive directors in the UK. Consultation paper of the review is available on www.dti.gov.uk. While Cadbury had betted on NEDs to review the performance of the board and of the executive and to take the lead where potential conflicts of interest arise, Hampel hoped that NEDs could contribute valuable expertise not otherwise available to management or act as mentors to relatively inexperienced executives.
In India too there is no dearth of reports. Kumar Mangalam Birla Committee on Corporate Governance, for instance, classified NEDs into those who are independent and those who aren't. The Naresh Chandra Committee had pointed out the fallacy of independence in what may be apparently non-executive. If an executive in company `X' becomes a non-executive director in company `Y', while another executive of company `Y' becomes a non-executive director of company `X', then neither will be treated as an independent director, it was highlighted.
The revised Clause 49 of the Listing Agreement, which the Securities and Exchange Board of India, has been slated for December faced resistance from corporates mainly for the stipulation that 50 per cent of the board should comprise independent directors.
Since the governance angle has to be factored into audits, the Institute of Chartered Accountants of India came up with a guidance note for CAs such as that the auditor should ascertain from the minute book of the board meeting whether remuneration of non-executive directors have been decided by the board of directors.
The most recent thinking on company law, the Irani Report argues for a definition of independent director as a NED who is subjected to many taboos, as in the Narayana Murthy Committee report. However, rights and liabilities that Irani mentions are common for both the categories, ID and NED.
A Web site that is sure to trigger your curiosity, iswww.ecgi.org, of the European Corporate Governance Institute. Yet another interesting read is `Role of Independent Non-Executive Directors' is a paper by Moses Mo-Chi Cheng, President, Hong Kong Institute of Directors, available onwww.cipe.org. Independent non-executive director is a new concept in East Asia, writes Cheng.
"Independent attitude does not mean arrogance or must be different from others or deliberate fabrication of disputes; independent attitude does not mean non-cooperation or split or oral fight; nor does it mean to cast doubt or make criticism only for show," he cautions. `Non-Executive Directors: Their Value to Management,' is also a valuable paper from the Chartered Institute of Management Accountants (www.cimaglobal.com).
It will be wishful thinking to imagine that NEDs' pure and simple may well be in their twilight years, and will be replaced by a tide of IDs waiting in the wings. Yet, the phrase `non-executive' may progressively lose its sheen.
D.MuraliZeroBase @ TheHindu.co.in
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