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PwC Chairperson Sanjeev Krishan Says India Inc Boards Need More Diversity

Krishan, who helped draw up the new CII rules on independent directors, said the guidelines will encourage boards to appoint people of diverse backgrounds. 

By The Core Team
New Update
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Last month, the Confederation of Indian Industries (CII) released a set of guidelines outlining the duties of independent directors and their appointment process. The guidelines also highlight the importance of board evaluations “as a key element for building good corporate governance.”

When it comes to the guidelines of independent directors, the idea was to get more diversity on the board, Sanjeev Krishan, chairperson of PwC in India, who helped build the guidelines, told The Core. “Today we talk about risk management, geopolitics and the impact of that on business. [Or] supply chain disruptions, technology… so the intention was that how do we get more diversity into the board, so that the board is better prepared to navigate the company through all the disruption that it faces,” he said. 

The dearth of independent directors, particularly women directors, on boards of Indian companies is well known. Krishan said. “The independent directors also need to mature into their roles, get into the roles, feel more confident to be able to say what they're saying.”  

SEBI's Listing Obligations and Disclosure Requirements (LODR) norms currently require 'Liability Insurance' for the top 1,000 entities by market capitalisation. Now, the new CII guidelines have extended this requirement to all listed companies. 

“More and more people will be encouraged to put their hands up if they know that they will be secure. As long as they're not going to get hauled up for something that they're not fully involved in, if there is a security net to the decisions that they make in a non-executive capacity, they will be a little bit more vocal,” he said. 

As governance standards rise in India, so do challenges for businesses. Hence, staying steadfast on governance is crucial. “Some of these (CII) guidelines, my hope is, will help in that regard,” he said. 

For The Core Report: Weekend Edition, financial journalist Govindraj Ethiraj delved into the critical role of independent directors in companies with Krishan. 

Edited excerpts:

I'm picking up on the new guidelines and appointment of independent directors and the process of board evaluation. What triggered these guidelines? 

We are seeing quite a few cases of companies in the listed universe, as well as the unlisted universe, where the board of directors clearly do not seem to have been either active, alert or even responsive to what's been happening in the companies. Now, these may be exceptions, but sometimes exceptions do stand out. Is this linked to what's been happening in the environment, or is this something that was generally proactive? 

I think there were three parts, really, to the conversation. The first one, as you said, is that with independent directors in particular, there is a lot that is being asked of them these days by regulation and even otherwise. The expectation is that they should be able to, in some ways, get some diversity. And I'm not just talking about the agenda. It is more broader in thinking because what the companies go through in terms of the disruptions are numerous. 

The board is supposed to be able to navigate the company, their organisation, through these disruptive times, etc. And they do need a broader counsel. So what's the point in having a very homogeneous set of people who are anchoring the board discussions? The idea was to have different people, maybe coming from diverse backgrounds. Today we talk about risk management, today we talk about geopolitics and the impact of that on business. Today we talk about supply chain disruptions, about technology, and how technology itself continues to evolve. So the real intention is to get more diversity into the board so that the board is better prepared to navigate the company through all the disruptions that it faces. 
 Now, in that regard, when you look at the independent directors, I think from an independent director perspective, the [task] of the independent director itself has been going up. A lot of that is driven by regulation, and the SEBI LODR (Listing Obligations and Disclosure Requirements) Regulations, etc. is the case in point, including what they have to govern and approve. So the intention was that while they do that, and that is important and driven by regulation, what is it that the composition of the board should be… so that it can do these things in a way that they're not just thinking about the here and now, but also thinking a little bit long term.

To the point that you mentioned about governance at large. I certainly believe that over the period of time, and this is possibly my 7th business cycle, now that I'm seeing governance standards in India have gone up, no question about it. But I think the challenges for business, and the opportunities for business have also gone up. And that's where the need to be steadfast about governance and be able to do more and more over a period of time. And I think some of these guidelines, my hope is, will help in that regard. 

The guidelines talk about how in addition to the roles of strategy, finance and audit, directors should absorb or embrace the ability to look at crisis and risk management, internal controls and maybe the geopolitics and the external factors that you talked about. But let me come back to responsiveness, and that's one reason why people are asking questions of independent directors that this happened, what were you doing? 

While independent directors may be qualified, even in the context of these new requirements, are they fundamentally ready to play the role that is truly asked of them?
 
I think we are getting there. It is also a question of providing them a bit of a security net because it's about how you look at a glass half full, half empty. And it doesn't mean that I shouldn't celebrate the glass half full. But it's also a question about how you look at it. 

We have also seen in several cases, without any active involvement of the independent board directors, that they have been hauled up by various agencies and that could be unnerving for somebody who's just coming in and contributing. I mean, let's be honest. How much time do the independent directors in particular end up spending? You might say that they end up spending a couple of days. They should get some advance notice of what's coming up for discussion. They should apply their mind… that's where it is important that as long as they're acting in good faith, we also provide them the security net, if I may call it so. 

That's one of the recommendations that we made through the CII guidelines effectively… just based on the statistics there is a dearth of independent board directors particularly women directors that India Inc is facing… I mean, independent directors also need to mature into their roles, get into the roles, and feel more confident to be able to say what they're saying. I think that's where some of the upskilling, which is needed both in terms of technical and how they conduct themselves also becomes very, very important. 

You’re saying that because there's a demand-supply mismatch, companies or external shareholders, who obviously want independent directors to act on their behalf, are not able to leverage their heft if they have any, or put their foot down if the situation arises? 

We need to have more people putting up their hands to be independent directors. And what I'm saying is that more and more people will be encouraged to put their hands up if they know that they will be secure. As long as they're not going to get hauled up for something that they're not fully involved in, if there is a security net to the decisions that they make in a non-executive capacity, they will be a little more vocal. 

They will be able to do and discharge their duties much more efficiently. Nobody wants to be in a position where I've played my role as an independent director. And one year down the line, two years down the line, I'm hauled up for something which I was not actively a part of. I mean, that makes the whole system insecure so to speak. So I think security is a big issue. 

Why do we want only retired people or semi-retired people? I would actively encourage people in executive positions to be in independent positions in some other organisations. I think it'll help them with their executive roles as they do some of that, etc. So yes, we need more talent to come through at the independent director level. 

At a very fundamental level, what do independent directors sign up for? When they accept a nomination or an offer to become a director on the board in some cases because compensation levels have been going up quite well, it's a handsome remuneration. But that apart, what are they really signing up for? 

First and foremost, it is about making sure that they're able to deliver on what the regulatory requirements are… [which] are now well defined under SEBI LODR and others. The other thing is that they have to in some ways be responsible to the entire stakeholders, not just the shareholders. And that's where the drift is — that I'm responsible for the entire stakeholder community. I mean that would include my employees, my supply chain, my distributors and so on and so forth. So you have greater responsibility. 

The other thing is also to make sure that you're not just thinking about the company today. As to that, there is a matter which has come up for my consideration, and I should say that I'll give my view on it today, but also to make sure that there is long-term sustenance of the company. 

The company and its executive are thinking things through a lot deeper and just not responding to a situation which is coming their way. Maybe there are hard calls to be taken, maybe it's a hard decision to be taken, but I'm challenging you to think about it. Maybe making investments which may actually create some challenges to your bottom lines today, but which will keep you in good stead over a long period of time. I think that is what the independent directors would sign up for. 

Initially, really to make sure that it helps the companies meet their obligations under the regulations. But then, more importantly, how do they make sure that the companies remain steadfast over a long period of time and are thinking long term and not just the near term and the short term? 

Let's talk about getting hauled up and the possibility that actions or decisions taken by the board lead to criminal prosecution… Now, I can understand that's a deterrent, but why should that be in some ways mixed with their fundamental duty and perhaps something that may be not liked by others to shareholders? And why should the fear of being hauled up for something else be mixed into this? 

It's a question of multiple things. One, of course, is how much time the independent directors spend on it. You mentioned remuneration is going up. And that may be a matter of fact. But the question really is how much time are we spending? What kind of preparation are they able to do? What kind of pre-reads do they get before they get into a board meeting? Have they had the ability to ask a bunch of questions? And are they asking those questions right? 

Now, if a lot of that is happening and if there is enough and more time which they are devoting, then, of course, a question becomes pertinent that anybody would be able to ask. And if I'm asking all the relevant questions, there's obviously going to be a bit of a challenge to the executive. If that is done, one needs to only appreciate the fact that I'm not in an executive position. What I even strategise, I'm not in a position to deliver or execute. That execution still lies with somebody else. 

As long as that differentiation is there and maintained, I'm in the position to challenge, question, counsel and mentor, and make sure that I'm able to put my advice on record. Now, subsequent to that, the outcomes might turn out to be awry for reasons of non-delivery, not acknowledging the advice, or indeed lacunae in the delivery itself. Now for those things, yes, one might say that in my subsequent board meeting was a review conducted. Did I come up on that discussion or not, and there are obviously questions which can be debated. 

But broadly speaking, I think the main challenge here is that if I have to get more and more people of talent, of pedigree, into the independent directorship, how is it that we support them in their mind, to say that we acknowledge that you're not in executive positions, we acknowledge that you are guides, mentors, and supporters on some level, but you're not in an executive position. Hence I need to secure you [so that] that tomorrow you and your family will not get challenged or hauled up for actions that you have not actively committed. 

When you talk about this liability or really making sure that liability is not open ended, this part of it is addressed to the government, and I'm assuming in the case of areas like tax and so on. 

Yeah, we have made certain recommendations in terms of how we could look at liability insurance for independent directors and why just the top few companies. I mean, maybe it should be more broad-based to listed companies and maybe some unlisted ones, because some of them are actually becoming more and more meaningful to the India story. So the idea is to have it a little bit more expansive in its reach wherever the independent directors have a bigger role to play. 

There could be businesses which may not be listed or which may not be so visible, but where there is a very significant role that they are playing. So the idea is to expand that to independent directors more broadly. 

But you're also saying that there should be some cap on the personal liability of an independent director if there was some, let's say again, an adverse tax order or an adverse tax prosecution, which is what your CII note specifically refers to. 

As far as the liability is concerned, it's well articulated in law as to what the liability of the directors is going to be. That is something which is just typically, I would say, a matter of law, and we didn't sort of necessarily want to get into a lot of that. I think the idea is, as I said, more to encourage more and more people to onboard this very important position in corporate India. 

You do talk about continuous evaluation, and that's interesting. How is that likely to play out in a structured way? Do you feel companies, first of all, do they do enough continuous evaluation? And secondly, if they don't, could they, or would they because of inputs like this? 

Well, I certainly think that that is an area of significant improvement from a board standpoint. I think the evaluation of the board, not just the independent members, but even others, is something which needs to be significantly showed up. There needs an institutional process which needs to be set up — that these are the principles, these are the guidelines or the framework in which we are going to evaluate the board members, independent and executives And there could be different evaluation frameworks for each one of them. 

The Nomination and Remuneration Committee (NRC) and others in some ways need to take a lot more cognizance of some of these and do their evaluations every three years. They can do it. They can change the parameters if they wish, every year, if they still wish.

There should also be communication. If I'm somebody who's not meeting the framework requirements, then there should be a discussion with me… that okay, this is what the expectation is, or maybe, simply put, I'm not participative enough, or I've missed a few meetings, which I've shown.  

The question is that one needs to be in communication. One needs to show that one is talking to them, and then we should actually document it. We should actually put it out and disclose it also that, okay, this is what we said. And maybe, as a result, we have actually reframed the guidelines. As a result, over a period of time, somebody has been in some way rated in a particular way. I think some of that is going to be very important and that will build confidence… I do believe that the evaluation mechanism will build in the wider community a greater amount of trust in this very important institution of India. 

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