SEBI Does The Unthinkable By Allowing Profit Share For Independent Directors

Indian promoters help themselves and their spouses to mindboggling salary, anything like Rs 50 crore to Rs 100 crore, through the simple expedient of commission-based remuneration.

The company law allows executive directors to be remunerated thus subject to a cap of 5 per cent for one such director and if there are more than one such director, then 10 per cent for all of them put together.

Thus if a company reports a profit of Rs 1,000 crore, its promoter can help himself to a sizeable sliver of it, ie, Rs 50 crore as his salary by appointing himself or his better half as its managing director.

This promotes the culture of winner takes it all as the second in command in the company might get a pittance in comparison by way of salary. Adherents of this model acclaim it as reward for risk-taking little realising that for risk-taking the reward lies elsewhere — dividend and market appreciation for their shares. Be that as it may.

Apart from encouraging unseemly disparity in salary, the regime has a more basic flaw — it encourages short-term outlook to boost profits by hook or crook. Cutting down on advertisements and research and development, which are examples of discretionary spends, boosts short-term profits but may be inimical to the company in the long term.

To achieve greater profits, accounting juggleries are resorted to. That is why commission-based remuneration for executive directors has attracted carping criticism. Americans therefore plumped for ESOPs (employee stock ownership plan) or employee stock options which sets store by the adage "eat the food prepared by you before you serve it to others".

If executive directors get a good sliver of their remuneration by way of shares of the company, they would be mindful and conscious of its long-term interests. The practice has caught on in India too especially among the IT sector companies and private banks.

It is against this backdrop, one has to judge the Securities and Exchange Board of India (SEBI) move to strengthen the hands of independent directors with among other things commission-based remuneration. Independent directors, who are non-executive directors are supposed to act as conscience-keepers of the company, and keep executive excesses in check.

If they are going to be allowed profit-based remuneration, they would start playing ball with the executive directors in boosting short-term profits to the detriment of the public shareholders.

This is hardly the way to attract talent. As it is, directors can be paid a maximum of Rs 1 lakh per board meeting or its committee meeting which is not insubstantial. But if it is felt that independent directors must be paid more per meeting, then sitting fees can be hiked for them.

However, what SEBI is seeking to do is to bring about parity between working and non-working directors by allowing the latter too to partake of the profit spoils.

Even today, part-time directorships are worn like a badge of honour. Celebrities among others who are appointed to this ornamental post are known to flit from one board meeting to another to collect multiple cheques for Rs 1 lakh each on the same day.

Far from checking executive excesses, independent directors have watched either helplessly or wantonly the working directors run amok. Thus Satyam, Yes Bank, ILFS, DHFL and other high-profile company debacles and plunders happened in India under the very noses of the independent directors.

Of course, it is silly and naive of our lawmakers to expect independent directors to be the primary whistleblowers when that task squarely belongs to the auditors.

The truth is while executive directors have an overarching and burning ambition, part-time directors, including independent directors, are simply apathetic apart from honourable exceptions. They simply look the other way. Often conflict of interests mark their appointment.

A tyre company founder might find a berth in an auto company and vice-versa. Both feather their nests despite the solemn rule against interested directors participating, much less voting, in the meetings in which the agenda turns on an issue impinging them directly or indirectly.