Proxy advisory firm InGovern has raised a red flag on the average tenure of independent directors and statutory auditors of top listed companies in India.
About 22% of independent directors have served on their companies’ boards for more than nine years and audit committees of only 45 companies are composed of ‘only independent’ directors, according to the firm’s India Proxy Season 2012 Analysis special report, which has analysed the corporate governance structure and practices prevalent in top 100 companies forming part of the Nifty and Junior Nifty indices.
The report also highlights the fact that the percentage of independent directors among the companies analysed was as low as 54%.
According to the report, the average tenure of the statutory auditors in companies in the Nifty and Junior Nifty indices was approximately nine years. ?Barring public sector companies, where appointment of auditors is done by CAG on a three-year rotation basis, 53 companies have had the same statutory auditors for more than five years and 30 companies have retained the same audit partner for more than three years. Thirty one companies out of these had the same auditors for 10 years or more,? said the report.
Clause IV C (i) of the Voluntary Guidelines for Corporate Governance issued by the ministry of corporate affairs recommends duration of five years for rotation of the audit firm and three years for rotation of the audit partner.
The percentage of independent directors on the 100 companies analysed is about 54%, with 14 companies having less than 50% independent directors on their board. ?Of the 14 companies, nine companies did not have an independent chairman as on March 31, 2012, and, hence, were not in compliance with Clause 49 of the Listing Agreement,? stated the report.
Out of the 100 companies analysed, only 45 companies have ?only independent? directors in its audit committee, according to the report.
Clause 49 of the Listing Agreement mandates listed companies to have a minimum of three directors as members, two-thirds of which shall be independent directors along with the chairman of the audit committee being an independent director. However, as a corporate governance best practice, InGovern has recommended that the audit committee should comprise only of independent directors.
The average tenure of independent directors in the 100 companies analysed is about six years. However, 18 companies had independent directors with average tenure of more than nine years and 22 companies had more than half of the independent directors serve on the board for more than nine years.
?Companies like Asian Paints, HDFC, Mahindra& Mahindra, Colgate Palmolive, Cummins India, Divi?s Labs and Exide Industries have more than 80% of their independent directors who have served on the board for more than nine years,? stated the InGovern report.
Clause 49, Annexure ID (1) of the Listing Agreement requires that no independent director should serve on the board for a period of more than nine years.
The average board size of companies analysed is about 11 directors, pointed out the InGovern report. Thirty companies had board size of less than 10 directors; 60 companies had a board size of between 10-15 directors; and 10 companies had a board size of more than 15 directors.
InGovern recommends that companies have a board size of 7 to 16 directors: ?This is so that the size of the board is large enough to ensure diversity of expertise and opinion and allow key committees to be staffed by independent directors, but small enough to allow all views to be heard and to encourage the active participation of all members.?
The average board attendance was 86% for companies forming part of the Nifty and Junior Nifty indices.
Interestingly, one in five of the directors on an average attended less than 75% of the board meetings. ?Maruti Suzuki, Ashok Leyland, Cummins India, Exide Industries, Shriram Transport and United Phosphorus had more than half of its directors attending less than 75% of the board meetings,? said the report.
InGovern, however, is optimistic that Indian companies are experiencing the emergence of a corporate governance landscape substantially different from a few years ago.
?Sebi?s regulatory changes, such as increasing public float in listed companies and mandatory requirements on institutional investors for disclosure of their voting patterns, have facilitated better governance practices. The new Companies Bill also brings increased focus on company disclosures, mandatory requirements for constitution of independent directors, auditor rotations and other provisions for protecting minority shareholder interests such as class action suits,? InGovern said in its special report.
