More leeway for shareholder control

Company boards are filling up with independent directors, with 10% more joining last year than in 2020. Vacancies and resignations fell by a quarter after the Indian government said that independent directors could avoid prosecution for corporate fraud if they establish that they were unaware of it.

In addition, the Securities and Exchange Board of India (Sebi) has tightened rules to improve governance by weakening the influence on independent directors of promoters and management. Beginning in January 2022, they will be appointed or removed by special shareholder resolution requiring a 75% favorable vote. Previously, this could be accomplished by ordinary resolution, which requires a 50% vote.

Minority shareholders have had a say in the appointment of independent directors, whose role is to protect them from conflicts of interest. The nomination and remuneration committee, responsible for choosing the candidates for nomination as independent directors, must explain the reasons for their choice. The committee itself must be composed of a two-thirds majority of independent directors, compared to a simple majority previously.

The audit committee must be composed in the same way and the independent directors of this committee are empowered to offset transactions with related parties. Along with a greater voice for independent directors, Sebi is also open to the idea of ​​giving companies greater flexibility in setting their fees, including as equity, within the overall limits prescribed by law. on companies.

By improving internal controls, the new operating environment gives independent directors a greater role in controlling shareholders. Attracting talent through better compensation should also improve governance. The majority of independent directors surveyed in a recent survey are now less concerned about corporate fraud and see their role in minimizing risk. They are more concerned with transparency and compliance. They also concede their need to be better trained for their jobs. All these developments are welcome for businesses and markets.

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