I had written Why Independent Directors are ineffective here sometime in May 2009.
Some time ago I read about Relics in Board rooms, where the types were categorized by a Prime Database study that classified in 4 broad types
75% Home directors - known personally to promoters - relatives, friends. Several loopholes exist in the Companies Act allowing their induction.
15% Value directors - people that either bring knowledge and expertise to the company - lawyers, technocrats etc. or provide it with a strong network.
5% Celebrity directors - inducted to add an aura of respectability & news value to the company including film stars, sportsmen etc.
5% PSU directors - typically appointed by political high command or ministers concerned, most are either politicians or bureaucrats.
So finally except 10-15% do Independent Directors really add value? And why does the Companies Act not get modified? Everyone I spoke to really had no answer.
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To the first point: Independent directors (IDs)can not, in practice, add value in a system like ours where promoter family is also the dominant shareholder in a majority of companies. The existing system of independent directors in India was borrowed from the US where corporate ownership is dispersed and in a majority of corporates, promoter families hold only 2 to 3 per cent of company shares.
Moot point: The Indian system of IDs needs an overhaul. Too much work, too little incentive (in overhaul) for promoters, accountants and corporate lawyers.
Second point: All of the above concerns (home directors, celebrity directors have been discussed time n again in various reports filed by industry thinkers). Some correctives , like fixing minimum age limit and experience, have been introduced in the new Companies Bill 2008, re-tabled in the parliament early this month(the relationship-with-promoters lacuna still exists). But the larger issues discussed in your blog still remain.
August 24th, 2009 at 4:26 am