Quality independent directors are hard to find today. Ask Azim Premji. India’s third-largest IT company, Wipro, is about to join the horde of companies violating Sebi norms by keeping independent directors beyond the suggested nine-year maximum tenure.
After the Storm: The Unregulated Effect of a Corporate Governance Crisis on Corporate Boards by Rajesh Chakrabarti, Krishnamurthy Subramanian and Naresh Kotrike compared the composition, characteristics and compensation of boards before and after the Satyam crisis for close to 2,500 firms. They find boards have become larger and less independent. Independent directors became more aware of the risks and in the three weeks of January 2009, exits soared to 109 from a monthly average of about 30 before the crisis. They still remain more frequent even though pay is up 30%.
The ones with the most reputation to protect simply exited the market bringing a drop in quality. More firms are now left vying for a smaller pool of independent directors, raising the number of directorships per head.
It would be interesting to determine if this hypothesis is correct. Another reason for the exit, although it may involve far fewer, is that they didn’t want to draw attention to themselves. At any rate, the authors also note that independent directors are sitting on more boards and are less likely than before to be professionals such as lawyers/consultants, financial experts, and retired executives, civil servants and government officials.
The authors conclude that India Inc may have very well just started walking away from the idea that independent boards are better, “something it was anyway never too comfortable with. And the move is not wholly without logic. In a recent paper, Raghuram Rajan and his co-authors have argued that internal governance may well provide a viable alternative to the present system.” If true, why did The Economic Times title its article, The drop in the number of independent directors in boardrooms bodes ill for corporate governance (8/20/2011)?
I think the newspaper got it right. I wasn’t able to locate the study that purports to show what scheme of internal governance provides a viable alternative but I remain skeptical.