India Inc is finding it increasingly difficult to recruit independent directors (IDs) amidst a landscape of rising legal and reputational risks. This challenge stems from a confluence of factors, including a limited pool of qualified candidates, significant compensation disparities, and increasing scrutiny of corporate governance practices.
The role of independent directors is critical for upholding transparency, accountability, and the protection of minority shareholders within listed companies. They are meant to serve as impartial custodians of fairness, ensuring that the interests of all stakeholders are considered, not just those of controlling shareholders. Recent amendments to the Companies Act in 2013, spurred by corporate scandals like the Satyam scam, mandated the appointment of IDs to reinforce corporate governance and ethical practices. However, the supply of individuals qualified and willing to take on these roles has not kept pace with the demand.
One of the primary hurdles is the perceived increase in personal liability. Independent directors are expected to act as rigorous watchdogs while simultaneously providing strategic advice, a difficult balance to maintain when information is incomplete or delayed. The Satyam scandal, where approximately 620 IDs came under scrutiny and resigned, serves as a stark reminder of the potential risks. Even Harvard University professor Krishna Palepu was fined Rs. 2.66 crore in 2018 due to the Satyam scandal. While an ID can only be held accountable for actions that occurred with their knowledge, consent, or due to a failure to act diligently, the trial process can be slow and cause immense harassment.
Another significant challenge is the limited access to a wider talent pool. Many companies rely on existing networks and personal contacts when making board appointments, overlooking a growing pool of skilled professionals such as consultants, lawyers, and risk management experts. This reliance on a small circle of individuals leads to a situation where a few IDs are overbooked, serving on multiple boards simultaneously, which raises concerns about their independence and effectiveness. Data indicates a significant number of vacant board seats in top companies, highlighting this imbalance.
Cultural dynamics within Indian boardrooms also contribute to the difficulties in attracting and retaining IDs. Unlike their Western counterparts, IDs in India often lack structured onboarding processes, dedicated support staff, and access to external advisors. Promoter-driven nominations, even when legally compliant, can create subtle pressures and a culture of deference that undermines true independence.
Compensation also plays a role. While compensation for IDs can range from Rs 12 lakh to over Rs 2.50 crore annually, with sitting fees between Rs 20,000 to Rs 1 lakh per meeting, this may not be sufficient to offset the increasing risks and responsibilities associated with the role.
To address these challenges, experts suggest that companies broaden their search processes, prioritize merit-based appointments, and treat board seat recruitment with the same rigor as C-suite hiring. Increased transparency in the nomination and evaluation process, along with a more robust and empowered Nomination and Remuneration Committee (NRC), is also crucial. Embracing technology to improve access to real-time data and facilitate more effective oversight is another potential solution. Ultimately, fostering a culture of genuine independence, where IDs feel empowered to challenge management and protect the interests of all stakeholders, is essential for strengthening corporate governance in India Inc.
