Need of proficient process of selection of Independent directors in PSU’s

Independent director is a silent monitor on a company board-works as a watch-dog–and when it comes for public sector enterprises his role becomes more important for a healthy corporate governance. Independent director’s increased presence in the boardroom has been hailed as an effective deterrent to fraud and mismanagement, inefficient use of resources, inequality and unaccountability of decisions.

Moreover, the independent director plays a complementary role in providing professional and managerial advice to the Board. They are drawn from the public men, technocrats, management experts and consultants, and professional managers in industry and trade with a high degree of proven ability.

However, unless the selection of independent directors (IDs) is transparent and free from the administrative ministry concerned, the powers given to them can have a negative impact on PSU autonomy. In many cases, the practice of administrative ministry final say in selection of independent director has delayed some of the important decisions for the company.

For example, Coal India had to put on hold plans to raise coal prices, sign fuel supply agreement with power companies and initiate a price pooling mechanism as ID posts were vacant. The public offer of other companies such as NHPC, Power-Grid has also been delayed due to non-appointment of independent directors.

Therefore, the need of the hour is to change the process of appointment of IDs. The responsibility for selection of IDs should be given to a sovereign, independent and impartial committee and removing the role of administrative ministry in their selection. At present selection committee under Department of Public Enterprises (DPE) selects candidates out of the panel recommended by the concerned ministry. However a panel of eligible persons to be IDs is being maintained by DPE but this appears to be mere formality as this panel is never being used by DPE for nomination of IDs in PSUs. It could be considered by Government to give powers to DPE to nominate IDs in PSUs, from a panel being maintained by DPE, without the interface of concerned ministry.

Moreover these appointments be done proactively much in advance so that seats on the boards of PSUs do not remain vacant and true purpose of IDs being on board is fulfilled.

Further, only a conducive and legally binding atmosphere would enable the IDs to play the following key roles expected of them:

• Help in bringing an independent judgment to bear on the Board’s. Being totally independent of the company or its management, provide a candid view of the faults or shortcomings of the company’s plans and suggest measures for improvement.
• Bring an objective view in the evaluation of the performance of board and management
• Scrutinize the performance of management in meeting agreed goals and objectives and monitor the reporting of performance
• Add value to the decision making process of the Board of Directors by giving positive inputs and constructive criticism, wherever required
• Safeguard the interests of all stakeholders, particularly the minority shareholders
• Moderate and arbitrate in the interest of the company as a whole, in situations of conflict between management and shareholder’s interest.
• Facilitate sustainable development of the company.

Moreover, the enhanced role of IDs would enable the stakeholders trust the functioning of the management as well as the Board. The board, on the other hand, would become more vigilant while undertaking the tasks of policy making and use of funds. However, it is too early to say that every of the deficiency in the working of the company and in the utilization of stakeholders’ funds can be regulated with these measures.

It is also widely accepted that a process of continuous improvement of this institution is essential to address the challenges facing the ID system, so that the gap between what is expected of the IDs and what they actually deliver is reduced. While international experience could provide a useful guide, all legal and regulatory reforms necessary to make the institution truly independent and effective in India need to reflect the realities of (a) concentrated ownership and (b) paucity of competent IDs.

It is however recognized that raising corporate governance standards would require going beyond legal and regulatory reforms. Management, institutional investors and media have to play a complementary and facilitating role.

100 thoughts on “Need of proficient process of selection of Independent directors in PSU’s

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