Time For Nifty 500 Boards To Hit Refresh, Says IiAS

Tenured independent directors, lack of diversity and excessive promoter control continue to characterise India Inc.’s boards, showed a study by proxy advisory firm IiAS.

A three-year assessment of Nifty 500 companies, aggregating to 96% of the total market capitalisation in India, revealed that:

Promoter-owned companies dominate Nifty 500.
Promoter representation on boards has seen an increase.
Non-compliance seems to be the norm for PSUs.
Tenured independent directors aren’t helping board independence.
The conversation around women representation on boards needs to change.

Promoter Control Continues

There’s been an incremental increase in the number of multinational corporations, institutionally controlled and widely held companies. Despite the drop in actual numbers, promoter-controlled companies continue to dominate the index. Two of three companies in the Nifty 500 are promoter-controlled.

Promoters On Boards

The average board size which was 9.6 in 2018 has shrunk to 9.1 by 2020. This is mainly due to the lack of independent directors on the boards of PSU companies, the report pointed out.

Largest board size was 19 in case of Larsen and Toubro Ltd. and smallest was three in case of Mishra Dhatu Nigam Ltd., a state-run firm.

The expectation, IiAS said, is the presence of an adequate number of independent directors on the board will ensure that the discussion is more broad-based, with multiple perspectives. And that decisions taken are unbiased and interests of all the stakeholders, including minority shareholders, are taken care of.

A high promoter representation on board, however, deprives the board of an unbiased view of company’s operations, the report says. As many as 22 of the Nifty 500 companies had a promoter family representation of 50% or higher.

The report also highlighted that while the number of executive directors remained the same, the number of non-executive/independent directors has reduced.

Finally, in terms of composition, non-executive directors continue to be a mix of professionals, promoter family representatives, and nominees of parent companies, financial institutions, and regulatory bodies. Promoter directorships has seen an increase in the last three years.

PSUs’ Struggle For Independence

Currently, the SEBI regulations require boards to have at least 33% of the total number of directors as independent directors, in case the company has a non-executive chairperson. This number is 50% where the promoter is the executive chairperson. According to the report, as of December 2020:

70 companies do not meet the criteria for independent directors. 55 of these companies are PSUs.
In 375 companies, independent directors comprised of 50% or more of their board strength. Of these, 296 have a chairperson who is an executive director and/or promoter director.

Independent Directors’ Tenure

IiAS said an independent director’s ability to express unbiased views is inversely correlated to tenure. The law defines independence as a period of not more than 10 years. But, in beginning the clock from April 1, 2014, SEBI provided corporate India with a decade’s breather before having to refresh their boards. In 2020:

245 companies out of the Nifty 500 companies had at least one tenured independent director on their board.

As many as four companies had independent directors with tenure greater than 40 years and 19 companies had independent directors with tenure greater than 30 years on their boards.

Boardroom = Old Boys’ Club?

While the law requires presence of at least one woman on the board, IiAS recommended shifting the conversation to women representation as a percentage of total directors on boards instead of an absolute number. It points out:

25 companies did not have a single women director on their board. Two of these are institutionally controlled, two are promoter run and the remaining 21 are PSUs.
Only 21 companies out of the Nifty 500 companies had a female chairperson in 2020, despite the steadfast increase in women directorships over the years.
Only five companies had women representation of 50% or more on their board for 2020.

In conclusion, the pace of board refreshment continues to remain slow, IiAS pointed out. Often companies argue for tenured directors citing quality of their contribution to board deliberations and their institutional memory. These are valid justifications but in such cases, it is better to classify independent directors who’ve been there for more than 10 years as non-executive non-independent directors.

Finally, PSUs are still grappling to achieve independence and diversity, and most companies are just about toeing the line on women representation. Regulations have played their part and it’s now time for investors to hold boards to greater accountability, said IiAS.