Winds of change in US board rooms

Whatever else governance reform may mean, I have always been clear about one thing it should mean: independent directors cannot be selected by management; to begin with, at least some independent directors on the board must be chosen by institutional shareholders.

I am not aware of any country where this happens. It certainly does not happen in the cradle of the governance movement, the US. In the US, the majority of companies have provisions that allow shareholders only to vote for directors proposed by management or withhold their vote. This has created a situation where directors get elected even when they do not command a majority of shareholder votes.

As the head of governance Calpers, the California pension fund, notes in a recent FT article, this is set to change. Legislation has just been introduced in the US Congress that allows shareholders to say 'no' to a director proposed by management and to propose their own directors subject to certain clauses intended to keep out frivolous proposals. The legislation also seeks to separate the chairman and CEO rules, another reform I have myself long urged. The SEC, under its new head, is introducing proposals of its own that are consistent with such legislation.

Governance reform is on the agenda of Sebi as well. This is the time for Sebi as well as the government to take the lead to usher in governance reform along these lines in India as well. After the Satyam and Nimesh Kampani affairs, there is concern about the need to protect independent directors from legal actions in matters for which they can hardly been held responsible. Two independent directors are said to have quit every day since Satyam erupted- resignations to date total over 400.

A certain measure of protection for independent directors is fine. But this must go hand in hand with measures to strengthen the mechanism of independent directors. Independent directors who collect huge fees in return for nodding their heads to whatever management wants done is clearly not on.