Do independent directors enhance better corporate governance in companies in India?

Abstract

Purpose

The effectiveness of independent directors in making autonomous decisions for better corporate governance in organizations has often been questioned. This paper aims to investigate their role in company’s decision making in India and the reasons behind their ineffectiveness.

Design/methodology/approach

This paper examines the regulatory environment and ongoing reforms in which independent directors operate. It identifies crucial factors such as ownership patterns, the appointment and selection process that affect their autonomy. The analysis draws from newspaper articles, blogs, India’s regulatory requirements, The Companies Act and relevant related literature.

Findings

The findings reveal that the independence of directors remains largely in form but not in function. This paper recommends a fair and more robust selection through an independent authority, and disclosure of the resignations of independent directors. Independent directors should be given more powers and their risk-reward scheme should be analyzed.

Originality/value

The paper emphasizes the need for independent directors to be truly independent from the senior management, promoters, and other existing directors. It calls for tighter and more transparent appointment procedures to ensure that independent directors are not influenced by senior management and can bring objectivity to the company board.

Citation

Arora, A. (2024), "Do independent directors enhance better corporate governance in companies in India?", Public Administration and Policy: An Asia-Pacific Journal, Vol. ahead-of-print No. ahead-of-print. https://doi.org/10.1108/PAP-05-2023-0057

Introduction

A company’s board of directors is crucial in ensuring that business operates smoothly and the management acts in the best interests of all stakeholders. The listed companies borrow funds from banks and other financial institutions, and even general public has put their hard-earned money into these businesses. It is crucial that the board fulfils its fiduciary duty and reduces agency costs (Jensen and Meckling, 1976) to maintain efficient business operations. Through the regulatory requirements of The Companies Act 2013, and Clause 49 of Securities Exchange Board of India’s (SEBI) Listing Agreement, businesses were urged to add independent directors to their boards. Section 149(4) of The Companies Act 2013 provides that every public listed company is to have at least one-third of its board as independent directors if the chairman is a non-executive director (Ministry of Corporate Affairs, 2013). If a company has an executive chairman, then independent directors must make up at least half of the board. Since this mandatory quota has been introduced, a lot of focus has been placed on their role, particularly in the context of publicly traded companies. The intention behind their appointment was that they oversee and monitor the management vis-à-vis efficient working in the company to prevent the company’s funds from being siphoned off. The Kumar Mangalam Birla Committee Report (2000), appointed by SEBI under the chairmanship of Shri Kumar Mangalam Birla places restrictions on independent directors, stating that in order to maintain their independence, they must be free from any materialistic ties to the promoter, management, or subsidiaries. They bring a variety of ideas to the table and are expected to participate in the company’s decision-making without the influence of promoters and management.

Independent directors may contribute to many aspects of an organization if they operate independently in the truest meaning and spirit. According to the studies in this area, shareholders have benefited from independent directors’ oversight in reducing agency issues (Shleifer and Vishny, 1997). The company also benefits from the independent boards’ assistance for managing earnings (Klein, 2002) and spotting financial anomalies (Sharma, 2004). Further, independent boards have been linked favorably to stock prices that increase shareholders’ value (Cotter et al., 1997). The agency theory asserts that the board should have independent directors for effective oversight and monitoring of management; and help in reducing agency problems (Arora and Soni, 2023). The resource dependency framework also supports independent directors as they have access to external resources (Hoskisson et al., 2002).

Board independence has become a crucial and indispensable concern, following the series of corporate scandals in India. For instance, the popular Satyam scam (a large-scale accounting fraud of about Rs. 7800 crores in the year 2009) (The Hindu, 2015) or ICICI Bank - Videocon loan fraud where the Managing Director, Chanda Kochhar, abused her position by sanctioning loans worth Rs. 3,250 crores to Videocon group companies, which was an attempt to siphon the bank’s money (Shrivastava, 2022). Then the faceless Yogi National Stock Exchange (NSE) mystery, where the chairperson, Chitra Ramkrishna shared the exchange’s confidential information with a faceless spiritual man (Arora, 2022). She also violated the securities contract rules through appointment of Subramanian as Chief Strategic Officer, a newly created post at an annual salary of Rs. 1.38 crores which was later increased to 4 crores. Also, the battles between minority shareholders and promoters in cases like Yes Bank - Dish TV have brought the limelight again on corporate governance matters (CNBC-TV18, 2021). The issue at hand is the actions taken by independent directors during the occurrence of fraudulent activities or scams. Given their primary responsibility for oversight, had they raised the alarm early on, numerous investors could have been spared from incurring financial losses.

In almost every unethical, mis-governance and corporate corruption matter, one question is often asked i.e., whether the independent directors been able to discharge their monitoring and oversight duties in true sense. This is one area where the companies have fallen short of delivering flawlessness and the independence of independent directors has been continuously questioned. Had the independent members delivered their oversight role effectively, there would not have been cases like Satyam, Infrastructure Leasing & Financial Services (IL&FS) or Jet Airways etc. The independent directors are intended to act as a watchdog, investigate and inform the regulatory agencies of the companies’ poor management and unethical practices. Minor incidences of poor management may grow into significant instances of mis-governance and corporate frauds, if not stopped promptly. The idea is that while it may not be possible to totally prevent scandals or governance failures, their severity can be minimized, and they can be identified early on through the diligent supervision of independent directors.

Warren Buffet has been quoted as saying “when seeking directors, CEOs don’t look for pit bulls. It’s the cocker spaniel that gets taken home”, while commenting on the independence of independent directors (Zukis, 2020). Ajay Tyagi, former SEBI Chairman also admitted that “We are yet to get ideal solutions for ensuring the independence of independent directors, selecting the best-suited persons as independent directors and making their role more effective and meaningful”, while re-emphasizing the need for board independence (Laskar, 2021). These news pieces from one of the most successful investors in the world and another from the person associated with the market regulator of India, endorse that the independence of independent directors is at stake. The concept of independent directors was introduced in India after SEBI mandated the minimum requirements for them, triggered by Kumar Mangalam Birla committee recommendations.

The corporate collapses due to the lack of independence or effective monitoring by independent directors have been discussed in many regulatory debates. It led to continuous reforms by SEBI in the last two decades to strengthen board independence in corporate houses. Highlighting the importance of the issue, many scholars have linked the presence and proportion of independent directors with the performance of the company. The literature such as Jackling and Johl (2009) pointed out that board independence is a new concept in India, and it would take a few more years to have a significant impact on the performance. The divergence of views between Tata-Mistry still raises the question on the autonomy of independent directors. Their boardroom battle exposed the vulnerabilities of independent directors, leading to oust of Cyrus Mistry because of his conflicts with the promoters. Over a period of time, there have been several regulatory amendments relating to independent directors to empower them in the decision-making of the company. The research problem we have endeavored pertains to the inability of independent directors to effectively mitigate instances of corporate mis-governance, in spite of their mandatory presence on boards and their fiduciary role requirements. Extant studies have been conducted on the oversight role of independent directors and their contributions towards organizational success. However, the underlying research gap lies in identifying and examining the reasons due to which they fall short of discharging their duties. The purpose of this article is to analyze whether the independent directors have the autonomy to act independently in a boardroom, and if not, what are the reasons behind it. The research question is whether the corporate provides them a conducive environment to function in an independent manner. The environment includes the ownership pattern, the appointment and selection process of independent directors, existing regulations and ongoing reforms in this area.

The board’s independence is essential to ensure that it performs its duties objectively and keeps management responsible to the company. The article emphasizes the importance of the independence of independent directors in maintaining good corporate governance. The efficiency and effectiveness of independent directors are critical to the overall structure of strong corporate governance. The independent directors serve as a crucial intermediary between the management, board, and other stakeholders of a company, providing a harmonious equilibrium of authority and interests. Their role entails enhancing credibility of the company and governance standards by being the watchdog and assisting in risk management. They are looked at as a remedy to mitigate agency issues and address the requirement for a diverse and impartial viewpoint in the decision-making of companies. The interests of all stakeholders can be effectively safeguarded and advocated for, through the independent directors. Thus, they help in balancing corporate interests and improving corporate governance framework.

The next section reviews the literature on the ownership pattern of the companies. It provides a dialogue on the appointment process of independent directors. The paper then investigates the linkages between board independence and firm performance, and ongoing reforms related to independent directors. Next, the reasons why independent directors fall short of discharging their duties are discussed.

Literature review

This section develops the theoretical framework and reviews the extant studies on the ownership pattern of the companies, appointment process of independent directors and their relationship with firm performance.

Theoretical framework

This study is grounded in two theoretical viewpoints and emphasizes the necessity of independent directors on corporate boards. The agency theory placed a strong emphasis on the necessity of an independent board for efficient management oversight and monitoring (Arora and Soni, 2023). According to this theory, the board should consist of a majority of independent directors who oversee the management to assist shareholders in maintaining ownership by minimizing agency issues. Fama and Jensen (1983) have advocated the idea of having a majority of non-executive directors as they may function more effectively as overseers.

As independent directors have access to outside resources, the resource dependency theory framework also supports their presence on corporate boards (Hoskisson et al., 2002). Our stance aligns with previous scholarly works such as Hu et al. (2023), which assert that the presence of an independent board enhances effective oversight and contributes to the success of a company. Nevertheless, the extent of their autonomy is constrained by various factors. Therefore, the study aims to examine the potential factors which influence their capacity for independent decision-making.

Ownership pattern of Indian companies

In many countries throughout the world, family businesses dominate the economy (La Porta et al., 1999) and India is no exception. The ownership pattern of Indian companies is unique because of strong family ownership pattern. The family businesses comprise one-third of the Fortune 500 firms (Lee, 2004) and in India they account up to 85 percent of total companies (Deloitte, 2013). The family businesses such as Tata Group, Reliance, Suzlon, Bajaj, Birla, etc., have contributed to the gross domestic product as well as to employment generation in the country. Extant studies have examined how various aspects of family ownership affect the performance of Indian companies (Chahal and Sharma, 2022; Azizi et al., 2021). The non-family promoters help in improving the market value when the ownership level is low, but as their ownership increases, the beneficial effect of their active monitoring diminishes (Gupta and Nashier, 2017). The results from Chahal and Sharma (2022) have shown that the family businesses are not performing better than non-family firms in the Indian business scenario.

The independent directors of many companies have expressed during some off-the-record interactions that management does not appreciate excessive intervention from their side in decision-making. In such a structure, when independent directors ask an impertinent opinion or challenge the decision of CEO, they are considered trouble-makers. This culture affects the corporate governance system of the companies (Jackling and Johl, 2009). The family-owned firms tend to confine the key managerial positions to family members allowing them the decision-making power, thus undermining the intervention from independent directors. A study by Lefort and Urzua (2008) examined the importance of independent directors as an internal governance mechanism in companies with high ownership concentration. They found that companies with more agency conflicts tend to hire professional directors to improve corporate governance mechanism. Shan (2019) also concluded that board independence is negatively correlated with managerial ownership and vice versa. In companies such as Jet Airways where the promoters’ shareholding was high, the decisions of the board get influenced by the promoters. During 2019, when Jet was grounded due to liquidity crisis, the company had the opportunity to sell a substantial stake to Tata. However, the decision could not be executed as the promoter was against the idea of selling his stake. The cases like Satyam, Kingfisher Airlines, ICICI Bank highlight the importance and need for true independency of the board.

In a study of US companies, Klein (1998) has provided theoretical and empirical proof that directors are not puppets of management and act independently. It is vital for Indian companies to realize that independent directors should not function as per the whims of the management, but maintain a level of transparency and accountability in the boards through improved processes and disclosures.

The next section discusses the factors which are crucial to decide the autonomy of independent directors such as their appointment and selection process, as well as why they are falling short of discharging their responsibilities and the ongoing reforms in the area.

Appointment and selection process of independent directors

The appointment process of independent directors includes registration on the Indian Institute of Corporate Affairs (IICA) website, followed by an online proficiency self-assessment test. Based on this, a databank is maintained by IICA as per the provisions of Section 150 of The Companies Act, 2013. The independent directors are shortlisted from this databank after due diligence. The next step involves their nomination by existing directors after consultation with the promoters of the company. Additionally, this section states that members must vote at a general meeting to approve the appointment of independent directors. The current appointment process allows the promoters to influence the appointment and removal of independent directors and thus, undermines their ability to give a contrasting viewpoint from promoters in board meetings. Although the Nomination and Remuneration Committee (NRC) screens candidates for independent directorships, the selection is largely made by the promoters during shareholders’ voting. It is highly likely that they also work for the people who hire them, and in that case, it is unrealistic to expect that the monitoring and judgment by independent directors would be unbiased. SEBI planned to take an action in this direction and had announced in June 2021 that the selection of independent directors would be through a special resolution rather than a simple majority. Earlier, the regulator had also proposed a dual approval policy for the selection and removal of independent directors, one from the majority of shareholders and the other from the minority of shareholders. Although it was a holistic approach to strike a balance between majority and minority shareholders, as of now, it has not been incorporated into the regulations due to resistance and opposition from the industry.

To better regulate the appointment process of independent directors, it has been suggested in leading newspaper articles (Gupta, 2022) and blogs (Vakil, 2021) that the Ministry of Corporate Affairs (MCA) could establish an authority for their appointment, which would work independent of MCA. The authority would maintain the database and would be responsible for appointing independent directors. They would also report to the authority for their observations in the company’s meetings. The authority may scrutinize and take a note of any unfavorable or negative observations received from them and forward the same to SEBI, which may take timely actions. Such kind of appointment process would help the stakeholders as it may ensure that directors deliver their oversight function effectively. If the independent directors are independent in true sense and spirit, their oversight towards operations and financial irregularities may avoid any kind of mis-management and mis-governance in the company. It seems that the current appointment process, guided by their ownership pattern, defeats the purpose of bringing independence on the board, as their appointment as well as dismissal can be influenced by promoters, majority shareholders or management. According to agency perspective also, a fair selection process would enhance the monitoring power of the directors and may mitigate agency risks.

Induction programs for independent directors

At the time of the entry of independent directors onto Indian boards, a fundamental issue was raised: the roles and responsibilities of independent directors were not defined and lacked clarity, especially in promoter-dominated and family-owned group companies. It was considered necessary to educate independent directors about the history of the company, its operations, business model, competitive landscape, financial reporting, etc. Larger companies tend to conduct onboard welcome meetings for independent directors with the top management to give them an overview of the industry and the company. However, just an overview is not sufficient to explain the business challenges, critical areas, and the independent directors’ oversight role. Gradually, companies have put in place robust orientation, and induction programs to clarify their roles as advisory, watchdog, and whistle-blower. SEBI has introduced many programs in the past in collaboration with the IICA to provide training on their roles and clarify their responsibilities and expectations. All these efforts may ultimately enhance the oversight and independence of the directors and may reduce corporate unethical practices and corruption.

Linkages between board independence and company performance

Considering board independence as an integral part of corporate governance reforms, the impact of the same has been examined on the company’s performance in a huge strand of literature (Arora and Singh, 2021; Soni and Singh, 2020). These studies pertain to corporate governance in general, of which independent directors were only one component. Some empirical and conceptual papers like Masulis and Mobbs (2014), Goel et al. (2022) and Neralla (2022) reported a positive association between independent directors and firm value. On the other hand, majority of the studies such as Mishra (2023), Bhatt and Bhattacharya (2015), Martin and Herrero (2018), Bhagat and Black (2002) decline any relationship between independent members and financial performance. It is difficult to comprehend whether board independence has not brought any effective improvement in performance, or the board members are not actually acting independently. Al-Saidi (2021) found negative relationship between board independence and firm performance and that current independent directors do not add value to Kuwait’s listed firms. The proportion of independent directors may be compliant due to regulatory and administrative reasons also; and may not necessarily contribute to improved performance. The divergent outcomes may be attributed to variations in the institutional frameworks of economies and instances of non-compliance with regulatory requirements.

The independent directors contribute to other crucial aspects of multi-nationals such as audits, social responsibility, disclosures, reporting (Soni and Arora, 2016). An attempt has also been made to determine the optimal proportion of independent directors for Indian companies by Arora and Soni (2023). They found that the companies with more than 50 percent independent directors have a significantly higher firm performance, providing support to the regulatory framework.

Independent directors falling short of discharging their duties

A former executive director of SEBI has commented that “Being a corporate board director has been seen as a prestigious assignment. It has nothing to do with capability or accountability, it is some sort of Padma Bhushan or Padma Shri. Nobody has ever thought that being an independent director is a role where one has to exert oneself and put in time and effort” by J. N Gupta (Bothra, 2022). Their contribution in the company’s decision-making is more of a cameo role as they generally do not have anything material involvement. Most of the scams in the banking sector such as Yes Bank, ICICI bank and PNB have come into limelight through whistleblowers or regulators, but not by the independent directors. Rather, the board have been supportive of the CEOs of ICICI bank or National Stock Exchange (NSE), however thorough investigations have found them guilty.

Gupta shared several instances of violation of corporate governance norms where independent directors have failed to discharge their duties in true spirit in an article published with Forbes India (Bothra, 2022). For instance, independent directors in the remuneration committee of a company signed a recommendation to distribute 98 percent commission to the promoter-director and two percent to the rest of seven directors. Also, in one of the companies, after the death of one of the promoters cum executive director, his wife was given the position with similar remuneration, without carrying the necessary qualifications. The brothers of the promoter were already present on the board which made it a complete family set-up, without any objection from independent directors.

Although the above analysis has proved an association between independent directors and company’s performance, the interactions with them tell a different story. An independent director expressed on the condition of anonymity that they are selectively shared the details and facts of any important decision, and are not at all involved in operational decisions. When they wish to view some information on which the decision is based, they are given voluminous documents running into thousands of pages, which is not possible for them to read entirely, expressed another independent board member. Some directors even remarked that they willingly do not become part of family-run businesses as it is difficult to function independently in such businesses. Further, the information and perspective are provided from the management only and thus, may be selective and one-sided to suit their agenda. The independent directors have been snagged off-guard in several cases of significant accounting irregularities and governance lapses, siphoning funds, or related party transactions etc. The directors believe that their intervention would end their term with the company and in a lot of instances, discussions are not recorded in the minutes of the meeting, as in the case of NSE.

Reforms related to independent directors

In 1999, the Kumar Mangalam Birla committee on corporate governance introduced independent directors’ concept to India for the first time. In 2022, the Naresh Chandra committee pondered further about corporate governance. Lastly, Narayan Murthy committee modified Clause 49 of the listing agreement in 2004. Since then, initiatives and changes have been undertaken to develop and empower independent directors so that they can contribute towards company’s interests. The board statistics for independent directors are shown in Table 1. The ratio of independent directors rose from year 2015 to 2019, but in the later years of 2020 and 2021, there was a decline in this ratio, which can be primarily explained by a decrease in the number of independent directors in public sector enterprises (The Economic Times, 2021). It was also observed that some companies were still non-compliant of the board composition norms due to non-appointment in place of outgoing directors. Initially, companies hired their own friends and family members as the watchdogs because of the family ownership pattern of companies. However, with the stringent norms, they started hiring unrelated members. The same set of companies of NSE 500 have been taken as the sample for the entire period of calculation in Table 1.

The evolving role of independent directors has always been under scrutiny, triggered by popular scams in the Indian corporate world such as the Satyam, IL&FS, and NSE cases. The corporate governance scams have underscored the need for Indian laws to uphold corporate governance principles. The recent reforms related to independent directors have adopted a more professional, independent, and transparent approach for the appointment, removal, resignation, and other disclosures relating to independent directors. There have been continuous reforms to increase the powers of independent directors to make them truly independent. At the same time, laws have been strict if independent directors fail to exercise their monitoring roles which creates apprehensions for independent directors to take up this role.

Recently, SEBI has overhauled the selection norms for independent directors such that the appointment shall be through a special resolution demanding consent from a minimum of 75 percent of the shareholders. The NRC, which nominates independent directors, would be required to have two-thirds independent directors, against the existing requirement of a majority. Further, the NRC would also disclose the skills required by a competent and distinguished independent director. It also stipulates that former managerial personnel or their relatives should not serve as independent directors in the company before a cooling-off period of three years. As per Section 168 of The Companies Act 2013, a director may resign from the company by giving a written notice. The company places the information on its website and in the Directors’ Report of the subsequent general meeting. The board informs the Registrar about the same within 30 days along with the reason for resignation. The resigning director shall be liable for any offences committed during their tenure, even after their resignation. The resignation letters of the independent directors must be published so as to show the reasons for the exit in the middle of their tenure in the company. In many cases, the pressure from management or disagreement with promoters or the majority shareholders may force the independent directors to step out of the company. In 2018, a number of independent directors of Yes Bank resigned. However, the bank never made the letters of resignation available to the public. The bank’s board was subsequently replaced by a new board by Reserve Bank of India after State Bank of India picked up a majority stake in Yes bank to prevent it from failing completely.

These attempts may help investors gauge the nefarious reasons for their resignations. And yet in reality, many independent directors prefer not to reveal the exact reasons for resignations to maintain the relationship with the company or to avoid any adverse impact on the stock price if they hold stock options of the company. The authorities need to amend the existing laws and a need to re-define the role of independent directors in reporting the mismanagement or governance failures. The independent directors might not be able to prevent high-level management fraud or accounting irregularities. However, with a high degree of commitment and diligence, they ought to be able to see red flags when something is not right.

Discussion

The article discusses the appointment process of independent directors for Indian listed companies, their ownership structure, SEBI regulations, and the ongoing reforms taking place to increase the effectiveness of independent directors. It reviews the literature examining the impact of independent directors on firm performance. It concludes that the independence of independent directors remains largely in form and not in function. The main reasons include the biased selection process, pressure from promoters, and family-owned ownership structure. This study is significant for Indian corporate boardrooms, looking at the frequent lapses of governance in the companies.

The governance failures in the corporate sector have put the limelight again on the independence of independent directors, putting emphasis on their appointment and removal. They can be truly independent only when their appointment is unprejudiced. It appears from the discussion that there is a need for tighter and stricter appointment procedures to make sure that they are not influenced by management and should bring objectivity to the board. They are expected to be independent of management, promoters, existing directors, or key personnel. Also, to achieve true independence for independent directors, they may get assurance of remuneration even if they are not adherent of promoters or raise a red flag against governance matters of the company. Their job is to protect the interests of minority shareholders; they should be free from the doubts of being removed from their position if they raise compliance issues or governance matters of the company. Although there are rewards in terms of attractive compensation, there are associated risks. The legal proceedings against independent directors have been suggested by many analysts in case of company defaults, however it may create scarcity of truly independent directors. The cases such as IL&FS where independent directors have been held accountable by regulators, followed by legal proceedings have put high onus and risk on them. It may lead to a shortage of competent independent directors in the country.

The Confederation of Indian Industry (CII) has introduced guidelines for the appointment of independent directors to enhance board-led corporate governance in 2024. These guidelines propose the establishment of legal and procedural measures to protect independent directors from personal liability. They recommend that the initiation of prosecution should be a rare instance, rather than the norm, in order to maintain a balanced relationship between the risks and rewards associated with being an independent director. The risk-reward scheme for an independent director should be analyzed, and more powers may be delegated to them to raise red flags against irregularities and make their tenure more robust in the company. These powers relate to decision-making for making disclosures, accessing documentations and reviewing audit reports, managing internal control system, appointment and nomination of non-executives or other key managerial personnel, or freedom to expression without being questioned. Such powers are important to steer the governance wheel in a truly independent manner.

A similar perspective has been opined by Sanjiv Bajaj, Chairman, CII Corporate Governance Council also, “Independent Directors have a socio-strategic role viz. role of a conscience keeper of the corporate governance representing image of a business in consonance with the role of driving the business strategies. Given this role, it is important that compensation for independent directors is commensurate with their heightened responsibilities, strategic inputs and risk bearing - while running the risk of facing criminal liability actions.” (The Hindu Bureau, 2024).

The upcoming reforms regarding the appointment or removal of independent directors are laudable and can prove to be the game-changer, if implemented, to curb the governance failures or frauds in the company. The changed provisions and enhanced disclosures include requirement of special resolution for re-appointment and removal of independent members, strengthening NRC with more independents. It makes the process more transparent and deter the appointment of unsuitable candidates as the independent members, thus jeopardizing their corporate governance. The disclosures of resignation letters of independent members; audit committee requiring two-thirds of independent members and all related party transactions to be approved by independent directors are a welcoming move and would bring fairness to the governance of the company. The changes are progressive and might bring more accountability and public transparency for the company and grant more independence to the independent directors of the company.

Further, separating the positions of chairman and CEO might be favorable for the company. It was earlier decided to split these positions for the top 500 listed companies mandatorily; however, due to opposition from the corporate sector, the decision was made voluntary. Now, for the companies where the positions won’t be split, a lead independent director may be appointed to serve as the focal connection between other independent members and the CEO. These proposed changes could be a bold attempt to moderate the influence of promoters in the appointment and removal process of independent directors, however if the promoters’ intervention can be partially divested, then the independent directors may achieve true independence and bring a substantial change in the governance matters of the companies, which would help in eliminating corporate mis-governance. The objective of these role-splits is not to weaken the position of promoters but to improve the corporate governance system.

The author reinforces the views of Shri Ajay Tyagi, SEBI chairman at a corporate governance summit organized by the Confederation of Indian Industry,

“The market regulator has failed to ensure that the independent directors do not act under the influence of company promoters, despite several attempts. I must admit that notwithstanding various efforts, we are yet to get ideal solutions to issues such as ensuring the independence of independent directors, selecting the best-suited persons as independent directors and making their role more effective and meaningful.” (Laskar, 2021).

This suggests that the regulatory body acknowledges the limitations of independent directors and is actively implementing measures to safeguard their autonomy, as well as enhance the efficacy of the selection process.

Conclusion

The paper reflects that the autonomy of independent directors is pre-dominantly superficial rather than substantive. The agency hypothesis is proved to be valid in literature in its support for the inclusion of non-executive directors on boards. However, the concern lies in the lack of genuine independence with these directors. The primary emphasis should be placed on the fair selection procedure facilitated by an autonomous governing body, and it is imperative to disclose the resignations of independent directors in order to safeguard their independence. The risk-reward scheme for an independent director should be analyzed; more powers may be delegated to them, and the process of selection can be made more robust. While the procedures for selecting independent directors may be strengthened, the individuals who are not truly independent may never be so in future also. The corporate governance norms, regulations, and reforms cannot regulate human behavior. It is unreasonable to expect an independent director to operate impartially and against the interests of the majority shareholders when the former’s selection process depends on the majority shareholders and promoters. However, the regulator must strive to foster transparency in the appointment of independent directors and how corporate boards operate through improved processes and disclosures. Future scholars may turn their attention towards examining how the business sector in developed economies has streamlined the procedure of appointing independent directors. They may evaluate their effectiveness and challenges faced by them in other economies.

Table 1

Average proportion of independent directors in NSE 500 companies

Year	Average proportion of independent directors
2013	49.6%
2014	47.5%
2015	47.1%
2016	47.6%
2017	48.5%
2018	49.4%
2019	51.5%
2020	49.8%
2021	47.7%
2022	49.3%

Source: By author