Potemkin Village of Independent Directors

Over the decade has passed since the Cadbury Committee Recommendations has been adopted but the success in area of corporate governance remains elusive. As the economic power of the Board has been increasing, many structural changes have been suggested in mechanism of corporate governance in order to bridle the increasing power of the Board. Of the panoply of structural changes being discussed, few come with such broad support as the notion of the outside or directors on the Board. Though the success of combined code itself has been questioned, its recommendation of having an independent director remains to hold the highlight even today. Many argue that addition of independent directors to corporate boards would not only make the Board more independent by avoiding the conflict of interest, it will also solve the problem of corporate social responsibility without incurring the costs of external regulation. Hence, in tune with the practices in the West, India has also adopted a similar approach and has made the role of independent directors in corporate governance almost inevitable. The New Companies Bill suggests that one third of the Board to be comprised of independent directors. This paper will critically analyse the likelihood of their success in this new role. It will throw light on the obstacles independent directors will encounter in policing managerial conflicts of interest and in monitoring the maximization of shareholder wealth, especially in Indian scenario where most of the corporations are family owned. It is unrealistic to suggest that independent directors can perform the still more difficult task of fostering social responsibility well enough to justify eliminating or diluting regulatory controls on corporate behaviour. In the end, the paper will forward a few suggestions that will help in achieving the objective of independence.