The Independent Directors’ fraternity in India has taken a centre stage in public discourse with respect to their remuneration. Impeded by uncertainties such as: what exactly is their incentive to work for a company as an Independent director other than as a beacon for good corporate governance practices? How is their work different from a philanthropic directorial stint, keeping in mind the minimum amount of remuneration being awarded to them. These are questions which have hindered their growth and credibility in the boardroom. Market regulators and the relevant watchdogs of corporate work ethics have in the past few years been awakened to the vagaries of power abuse which is rampant in Indian
To provide the institution of Independent Directors with a sense of entitlement and belonging, they are being awarded a minimum sitting fees and an annual remuneration amounting to a sum not more than one percent of the company’s total revenue. The problem with fixing the amount of remuneration lies in determining its significance. Whether the company where they are serving as an Independent director is rewarding them for their ethical vigilance and manoeuvring or is it just
there to distinguish their services from philanthropy. The challenge is in hitting the right balance between an absolutely negligible remuneration and a fairly high one which reeks of a biased pecuniary relationship.
The corporate Industry has taken cognisance of this and has dynamically adopted a very elastic model. The current norm being, awarding a fixed sitting fees for each board meeting attended and; Distributable profits for payment of commission. Very recently, SEBI appointed Kotak Committee, in its report, has attempted to set the guidelines for ethical boardroom practices; it has recommended that the minimum total remuneration for an Independent director per year should be INR5lakhs for top 500 companies by market capitalisation. It further elaborates on the minimum sitting fees to be paid for every board meeting:
• INR50,000 for top 100 companies by market capitalisation.
• INR25,000 for next 400 companies by market capitalisation.
Avoiding a myopic view of the argument for a respectable remuneration to Independent directors, the case for rewarding them adequately for their services is of seminal importance. Independent directors have a pivotal role to play in good governance of the listed entities. Therefore a risk-reward balance in the compensation payable to Independent directors would make it attractive for competent people to accept appointments as Independent directors.
Serving as an Independent Director on a board requires them to involve themselves with the various management committees of the company. The Companies Act, 2013, provides for mandatory appointment of independent directors in
following committees so as to meet the corporate governance requirements:
• Remuneration and Nomination Committee
• Audit Committee
Value addition in these committees require a particular skill set and involves the Independent Directors increasingly in the governance of the company, which in tandem exacerbates their liability. On the other hand, an ever decreasing and fluctuating remuneration policy proves to be frustrating and counterproductive.
A way out of this quagmire could be to equalise the monetary remuneration that the company doles out to its directors. It can be done so by adopting a comparative performance evaluation of the directors on board by an independent agency. Hence creating a conducive environment for equality and unbiased workmanship.
Being the conscience keeper of the company, it is very important for the Independent Directors to be truly independent in their thoughts and actions. They should be able to dissent from the majority shareholders or promoters and not necessarily and imperatively tow their line in fear of a financial or social backlash. The very rationale behind keeping a minimal sitting fee and a cap on their maximum remuneration is to liberate them from obligations to the board. But the question still looms; how much is too little or too much?
Author: Neel Kanth
Disclaimer: THE STATEMENTS HEREIN REPRESENT THE CURRENT OPINION AND BELIEFS OF THE AUTHOR ONLY AND NOT THE ASSOCIATION OF INDEPENDENT DIRECTORS OF INDIA (AIDI). UNDER NO CIRCUMSTANCES SHOULD ANYTHING IN THIS POST BE CONSTRUED AS INVESTMENT, LEGAL, TAX, REGULATORY, FINANCIAL, ACCOUNTING OR OTHER ADVICE.