How to be an ‘independent’ director?

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A position as a director on a company’s board needs consideration of sundry aspects relating to the firm.If you are returning to this article, the second in the series, welcome back, else, please refer to the ten commandments of risk management for directors identified in my earlier article.

Now, let me deal with some of these risks and strategies for mitigating them. Let me dwell upon the first two rules. First, question whether it is a company that you really want to work with. Second, question whether you have the equipment and the knowledge to meet the expectations of the company and its regulators without assuming disproportionate risks. Let us take rules 1 and 2 together.

What do directors do? Simply put, they are expected to direct and that is why they are called directors. The opportunity for you to really direct will mostly depend on you and then the type of company you have been invited to and its leadership.

Good boards do not function as hierarchies. You are expected to contribute your mite to the board deliberations in the area of your expertise and strive to maintain your independence. Maintaining independence, of course, requires you to be alert but does not mean that you always function like police and doubt everything.

The board comprises equally responsible and competent people who generally govern companies by consensus if not by vote.

Yet chairmen of boards (and sometimes a director who may be a stronger personality) determine the style of functioning and they generally set the tone and content of board interactions. So get to know the chairman of the board that has invited you. Is he an executive chairman or non-executive chairman? If he is a non-executive chairman, find out what is his relationship with the CEO. Is the chemistry working between them? The chairman’s competence, objectivity, integrity and reputation will invariably reflect the organization’s values, culture and governance. Get to know who the other directors are.

Find out if there is diversity in the board or you are the only one contributing to the diversity. You can get answers to some of these questions if you carefully go through the annual reports of the company and browse its websites.

The company you are considering or the company that is considering you may be a highly visible listed company, or a subsidiary or an associate of another listed entity, a joint venture, a product of a merger or restructure, an entrepreneurial growth company, family controlled or a multinational or a government owned company.

Then these may be a manufacturing company or a services company. Again, it may be a profitable company or a loss-making one. The spectrum is indeed very wide and the domain knowledge required to operate at a board level in each case is also very different.

If you do not have a deep understanding of the business and requisite knowledge, then it becomes awkward for you to meaningfully assess the strategic direction of the enterprise and effectively contribute to board discussions.

The risks associated with the kinds of boards and companies enumerated above are different and therefore the strategies to mitigate those risks are sometimes unique. If it is a venture backed or private equity backed enterprise, the boards are generally very focused at least on a few things. Their tenacity and sometimes inelastic style may be difficult for some people to handle, especially if you are old enough. Having said that, these investors bring in a lot of discipline to promoter run businesses.

Various businesses operate under different regulatory frameworks. Manufacturing companies have to comply with several statutory obligations and the compliance regime for services companies are generally less cumbersome. Then there are businesses that are regulated by specific statutes.

Determine which laws govern the business and understand the risks associated with it. Browse the Internet and find out if there is any adverse information floating on the public domain. Your search string should also include the other board members. Interestingly, the Ministry of Company Affairs has recently mandated that all directors should obtain a Director Identification Number called DIN.

So in the future, when it is all wired up, one can electronically identify the non-compliant directors. This is a double-edged sword. Your association with a not so well-known company (or a well-known company for reasons that one cannot be proud of) will now become permanent public knowledge with the stroke of a few keys. One can also visit the registrar of company’s website and determine if the company has been regular in complying with various statutory filings.

The company you have zeroed in on should then be analyzed for its performance from whatever information is available about it. It could be published reports, prospectus, balance sheets, income and cash flow statements, stock market performance etc. If you have not dealt with these before, then annual reports can be a complex and difficult to understand document.

Please get some help from a friend who is financially literate. Do read the auditor’s report and its annexure. Look for any qualifications generally printed in italics or bold. See how these comments have been addressed in the director’s report. Also look at notes to the financial statements, especially disclosures on related party transactions. These should give you a general flavor of the organization.

You should also review the board charter, if the company has one. This charter is a governance guideline for all directors and this will typically address the role of directors, their competency framework, director’s investment in the shares of the company, the protocols for interaction with senior management and a host of housekeeping routines.

This is a useful document and its absence is an indication of the lack of clarity about the commitment that is expected from you as an independent director. In the absence of such a document, determine through dialogue what is the commitment expected from you and if it is too less, then your involvement could be unsafe.

After you have done your homework, you need to determine which are the boards that you will not be comfortable working with and why so. It may be because the companies do not pass your tests for acceptance or if you are honest you may decide that you perhaps do not have the equipment to function effectively.

Remember, it is better to say no if you are unsure rather than get on board and assume all those risks. If you have this clarity then it becomes easier for you to find answers to many other questions.

 

 

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