Shall independent directors’ pay be delinked from net profits?
April 28, 2010
Business Line dated April 28,20101 carries a report on the recommendations of the Nasscom’s Governance and Ethics Committee to improve corporate governance in India(“Delink independent directors’ pay from net profits:Nasscom”, Business Line, April28,2010). The committee, which was set up post –Satyam scam, has recommended that independent directors’ remuneration be delinked from net profits “to make it reflective of value addition, time and commitment brought to the company”. It is not clear as to the basis of the argument. Of course, the report says that it is a good practice to delink because linking it to the net profits may not be commensurate to the efforts and time spent by the individual. According to the committee, delinking may help “to bring more objectivity and performance orientation within the board”. Of course, the committee feels that the companies must have both options available to them and must be uniformly applied across all independent directors.
I fail to understand what is this “objectivity and performance orientation” which the committee is talking about. A corporate’s performance is by and large measured by the economic performance of it. And don’t independent directors have a real role to play in the economic performance of the company? While most of the non-executive directors don’t consider that there is no role for them in the performance of the company in its strategic or competitive perspectives, it is not true. They can play a major roles in strategy making, creating a unique position for the company in the marketplace etc. If that is so, their compensation should be linked to company’s economic performance.
While compensating them with stock options have to be handled with care(as this might tempt them to think like stockholders who usually have a short-term outlook), I strongly feel that non-executive directors’ pay shall be related to performance. Of course, this might give rise to problems like lesser or no remuneration when the companies do not make a profit and in some cases the companies will have to run without profit as in the case of long-gestation projects. Why don’t the companies decide on some kind of “Minimum Remuneration payable in the absence or inadequacy of profits” beyond the sitting fee as is usually done in the case of MD and other Whole-time Directors. But independent directors as contributors to the better performance must have a chance to participate in the better performance of the companies .
The suggestion for a lead independent director shall be applicable only when the positions of Chair and CEO are combined or when the Chair and the CEO are full time or when the Chair and CEO belong to the promoter group/family. If the chair is independent, then the lead independent director’s position will become redundant.
Other suggestions in the report like those on succession planning and whistleblowers are not anything new but only the implementation strategy has to be dealt with. Which family managed company in India will explicitly disclose about their intention to choose a particular person or persons(family nominee/promoter nominee/professional)as the successor to the current incumbent? While nobody makes it explicit, one ahs to read in between the lines and make inferences. They are also not necessarily sure about the succession plans. Could Mukesh Ambani have stated about a succession plan during the period 2002-05 while rivalry was brewing between him and his younger brother? And barring a few companies, very few companies across the globe have clarity and purpose about succession planning.
