'Independent directors should ask the right questions at the right time'

The concept of lead independent directors is new to India. Globally, they coordinate the activities of other non-employee directors and advise chairmen on issues ranging from the schedule of board meetings to recommending retention of advisors and consultants to the management. Infosys Technologies is one of the first companies in India to appoint a lead independent director. Swarup Chakraborty caught up with Deepak M Satwalekar who is the software major's lead independent director. He was earlier MD of HDFC and HDFC Standard Life Insurance. Satwalekar says independent directors can't magically stop scams from happening in a company, but they can at least play an important role to put the checks and balances in place by asking the right questions. Excerpts:

What steps in corporate governance should be taken that frauds like Satyam are not repeated?

None. Corporate governance can not stop frauds. Satyam got the Golden Peacock award for their corporate governance. I don't think the independent directors or the board can stop a fraud. I don't think that the audit committee can stop a fraud. They can only make sure that misdemeanours can be identified and the internal controls in the company are in place but if the management of a company decided to commit a fraud then it is very unlikely that the board can stop it. Where the Satyam board could have been found wanting is their decision to buy into Maytas and they can be questioned about it but on the fraud, I don't think so.

Should an ID be held non-guilty in case of a bad decision in a board meeting where he was not present?

If he was not a party which means if a decision was taken in one's absence or without one's knowledge then s/he can't be held accountable but in case that the person was present and did not like the decision but did not say so, s/he would be fully responsible. If one does not like a decision then it should be recorded so that it can be defended otherwise s/he is a party to that decision. However, if s/he was not present then s/he was not a party to that decision.

We know that independent directors (IDs) are paid by companies. In that context how independent are IDs in India?

Despite the fact that an independent director is paid by the company, it must be borne in mind that the company is not only owned by its promoter but all shareholders. And the IDs are supposed to represent the interest of the minority shareholders. We have companies which are minimally owned by promoters but professionally managed. IDs are distinct from the ones who actually run the business. We need IDs not just to keep an eye on the management but to give inputs from which the management can benefit.

What is the basis for selection of IDs?

You need to be clear what are the attributes you want in the IDs. So you may wish to have an economist on the board, if you have global operations then you might have somebody from overseas. If your business is in Asia, then you might want to have someone with an Asian perspective and so on.

Do you think only experts of the business that a company is in should be chosen as IDs?

There should be some IDs who understand the core business of the company. If the entire board has directors who are geniuses of the business the company is presently in, there would hardly be anyone to assess the chief executive's decision to diversify into other businesses if he so decides. While understanding the technicalities of the business is important, understanding business in the larger perspective is much more important.

How much authority does an ID have to interfere in the operations of a company?

None. An ID has no right to interfere in the day-to-day operations. S/he has the right to intervene in any misgivings or misdeeds. He has to support management in getting the delivery of what the objectives of the company are to its shareholders. An ID has to decide how intervening or passive s/he is going to be, one can't have a fixed number of questions that an ID should ask. One has to exercise due diligence, ask the right questions at the right time and get the answers. The idea is not to ask questions for the sake of records that so-and-so ID asked so many questions. The objective is getting the answers and if I don't get a proper answer I should be ready to ask a further question.

There is ambiguity in the guidelines for constitution of a board in India? What percentage (33 or 50) of it should be IDs?

At this point, it is only a recommendation (33 per cent of a board should be IDs) from the corporate affairs ministry. It is only when the Companies Bill is passed and we have an Act that it might change. As of now it is 50 per cent in the case of an executive chairman on the board but in the case of a non-executive chairman, one-third of the board should be IDs so there is no conflict over there.

What according to you is the correct mix?

For example, HDFC has an executive chairman but there are 3 executive directors and 12 IDs. That is how they have chosen it to be. I think governance and compliance should be arising out of a desire to meet the spirit of the regulation and not the letter of the regulation. I think we as corporate India have to rise above the letter of the law and get into adherence of the spirit of the law.

What is the trend globally?

Globally they don't have as many executive directors. Generally you might have the CEO and CFO on the board so you have just one or two EDs while the rest of the board is constituted of IDs.

Should it be made mandatory for IDs to attend all board meetings?

I don't know how you can make it mandatory. There might be incidents not in the control of a person which might lead to his/her absence. There are a couple of ways in which this can be addressed. I think there is a new amendment to the Companies Bill where you can participate in a board meeting through video or audio conference without being physically present and this is a big change that has happened.

There have been debates on the compensation of an ID. Who do you think should fix it and what should be the criteria?

The nomination committee and the remuneration committee should fix the compensation of an ID. We need to evolve criteria as it is not very easy. There are two views you can take: One is to pay a minimum amount to make sure that s/he remains independent. The second view is whether a higher amount should be paid because of the time s/he would devote and the responsibilities s/he would shoulder but then there is the risk of being accused that the company bought him/her.

Should there be negotiations between the management and the person it wants to hire as an ID for remuneration?

How can you decide whether Rs 5 lakh, Rs 50 lakh or Rs 1 crore is the right price? If a person is invited on the board because of the qualities, the value that would be brought to the table then s/he should be adequately rewarded. If you don't or can't pay rightly then you should not complain that they hardly attend any meetings. No, I don't think there should be any negotiations or individual one-on-ones, it should be across the board. The board should decide what it should it be.

You are the lead ID at Infosys. In that role do you ascertain that other IDs carry out their duties sincerely?

We have been fortunate at Infosys that we did not have to whip anyone to come and do their duties. As a lead independent director I organise closed executive sessions where only the IDs meet and the issues and concerns that we have are voiced over there and as the lead I take them to the chairman and the CEO to get them addressed in the same meeting or in the next meeting. The agenda for the main meeting is also set by what the IDs would like to happen in the next meeting.