A series of developments in the corporate sector ranging to the disastrous privatisation of Lanka Marine Services Ltd, ‘doctoring’ of accounts by listed companies and insufficient disclosure have once again brought to focus the role of independent directors in these companies.

Under Section 6 of the Rules of Corporate Governance in the Colombo Stock Exchange there is an elaborate criteria for defining ‘Independence’. Amongst a host of rules, it says that subject to Clause 6.3 (a) and (b), a non-executive director shall not be considered independent if he/she has been employed by the listed company during the period of two years immediately preceding appointment as director; currently has/had during the period of two years immediately preceding appointment as director, a Material Business Relationship (mean a relationship resulting in income/non-cash benefits equivalent to 10% of the director’s annual income) with the listed company, whether directly or indirectly; has a close family member who is a director, Chief Executive Officer (and/or an equivalent position) in the listed company and has a significant shareholding in the listed company.

However there are no clear rules and guidance by regulators on how directors should operate, their roles and responsibilities. President of the Federation of Chambers of Commerce Nawaz Rajabdeen says that independent directors should be truly independent and it is essential to do away with the Sri Lankan practice of packing boards with ‘yes men’.

He added that most of the Sri Lankan companies, directors are appointed by the major shareholder and therefore they are not independent. These directors carry out the directives of major shareholders without considering its impact on the performance of the company.

He pointed out that some companies require independent directors to see them through a corporate transition such as a change in ownership and the non executive director may bring highly specialised knowledge invaluable to a company going through a flotation, relocation, rebuilding programmes and/or strategic alliance. At its simplest level, an independent director might just be brought in to fill a temporary shortage of in-house qualified directors, he said.

Mr. Rajabdeen emphasized the need to bring in people of competence with professional qualifications as independent directors rather than appointing ‘yes men’ to boards. He asserted that no one should look at independent directors as being hostile to board of directors of companies as they are very useful to any company. An independent director however can often see risks and opportunities in the market place that are sometimes overlooked by the executive management. This is because they are not wrapped up in the day-to-day running of the business. An independent director can, step back from the stress of everyday business life and see things from a different perspective. They can provide a vital strategic overview, he said.

Aritha Wickremanayake, Partner, Nithya Partners noted that when independent directors indulge too long in their positions, they may not be able to independently act when taking an unbiased decision. "When they are too long in the same post their decisions can become coloured," he said.

He said that in most firms, independent directors are retirees and for the most part old. This, he said coupled with the stipend they get, other benefits plus the 'prestige' does not allow them to 'rock the boat'. "As such they will become dependant on the board," he added.

Mr. Wickremanayake noted that despite the notion that the presence of the independent directors in a board will induce fair decisions, they are still a minority. "They may be voicing their opinions, but these may not be reflected in the director board's final decisions.

He said in other countries, there is something called 'peer reviews'. "Here the directors evaluate their fellow directors." K.C. Vignarajah, a public rights activist who has been constantly raising issues on minority shareholder interest, said that independent directors should ensure transparency and disclose maximum material information which affects the decisions of the shreholders and the investing public on their purchase decisions.

"In effect, he/she should represent the independent and minority shareholders monitoring the activities of the controlling interest and the executive directors in managing the affairs of the company," he said.
He said the process of selecting independent directors is hilarious. "They should be elected by the independent and minority shareholders within the controlling interest and directors should not have any say in it. This should be practiced in selecting auditors as well," he said, adding that if not it will be like the thief appointing the policeman.