An American MNC is the process of signing on marketing consultant Kamini Banga as independent director prior to its foray into the Indian market. Yes, she's name, but it is her work experience that caught its fancy

It works in a myriad ways. The hand of the independent director on the board of the company, that is. There's this strictly-in-the-realm-of-grapevine story that the prime movers in the exit of star performer Phaneesh Murthy from Infosys, following allegations of sexual harassment, were the company's high profile overseas independent directors. The company's board boasts personages such as former senator Larry Pressler and former head of World Economic Forum, Claude Smadja. And no, we have no more details on that particular story!

Independent directors, essentially directors with no business relationship with the company (as shareholders, suppliers, even competitors) who exist as a mandatory SEBI (Securities and Exchange Board of India) requirement for listed companies-the rule says half the board of companies with a non executive chairman needs to be constituted by independent directors-add a significant amount of polish and sheen to the company image. And they bring to the table good counsel born out of specialisation in their respective fields as well as years of experience. As Larry Pressler observes, "Most of our duties on the Infosys board are to help make business judgments to enhance shareholder value. Of course any chance I get to put a good word for Infosys, I do, but it is such a well-known and gold-plated company that its reputation is very well established among interested customers."

There is no arguing the fact that independent directors that are names are good for the brand equity of the company. That could be one reason why start-ups, especially those in the IT services and Business Process Outsourcing area, go all out to snare names for their boards. For instance, Bangalore-based telecom software product company Subex Systems, has high profile fund manager Vinod Sethi (formerly of Morgan Stanley) on its board. Even large companies, such as Infosys, HLL, and Godrej Consumer Products can benefit, in terms of brand equity, by having names on their boards. HLL has C.K. Prahalad, Infosys, the two luminaries named in the first paragraph, and Godrej, management guru Bala Balachandran.

Companies, however, are rapidly realising that independent directors can do a whole lot more than reinforce brand equity or market a company (passively, of course) to key target groups. Just ask Anand Mahindra, Vice Chairman and MD, Mahindra and Mahindra. The M&M board sports names such as Dr Ashok Ganguly (former Chairman Hindustan Lever) and Anupam Puri (former chief of McKinsey India). "Dr Ganguly has had years of experience in R&D and he heads our R&D subcommittee, he has regular meetings with me and the R&D heads and outlines action-oriented agendas and also lays a lot of emphasis on accountability for execution of ideas," says Mahindra. "Puri spends an amazing amount of time with our company and sits down with all senior executives whenever possible. Sometimes one gets a lot of consultation from these members without having to go formally to a consultant."

Management Guru C.K. Prahalad, a member of HLL's board, has helped the company fine-tune its reaching-to-the-poor strategy

"Independent directors are particularly important in today's context where they oversee governance and fiduciary issues. They also look into the compensation of working members and issues of succession planning and are also great as a source of strategy validation," says Nandan Nilekani, CEO, President and MD, Infosys Technologies.

But how do companies actually go about picking these independent directors?

R. Gopalakrishnan, Executive Director, Tata Sons, who is himself an independent director on the boards of ICI, Castrol, and Anand Bazaar Patrika, has a three pronged filtration process whilst picking directors for companies that he heads. "Personal stature of the director, complementarity of his background with the others on the board, and how much time he can give the company serve as three filters. What I mean by complementarity of statures is that I don't want three stalwarts who are all lawyers or tax experts on board, then that's the only subject we'll wind up discussing at meetings and if the person is going to be on a 100 boards, then I would think twice about it."

As for how the search process actually unfolds, IMC (Indian Merchants' Chamber) President and well-known chartered accountant Shailesh Haribhakti, who is on the board of nine listed companies and several unlisted ones, recounts, "Companies invariably search for independent directors through their own top management teams. For instance, when I was auditor of Wockhardt, I knew the finance head of the company well, when he went on to another company, he recommended my name for independent director."

The compulsions for seeking the right type of independent director are rapidly evolving given the global nature of businesses and the need for market specific knowledge. Take the case of an American multinational that is in the process of signing on marketing consultant Kamini Banga as independent director just prior to its entry into the Indian market. "I can't name the company right now, but they are planning to enter the Indian market and they find my work experience in their market significant," she explains.

Companies are out on a limb to get the right kind of diversity into their boards and realise that getting the mix right is important to their bottomlines

Banga has other interesting observations on the way companies are actively looking to fill their boards with all the right ingredients. "Companies are out on a limb to get the right kind of diversity into the board. Some companies are specifically looking for women directors, while others are looking at representation by a particular community since they realise that the right mix on the board actually reflects on the bottomline (of the company) and research is starting to bear this out."

Sharp segmentation in consumer markets is also driving the need for diversity in the boardroom; a sizeable proportion of customers, for instance, is female.

The appointment and tenure of independent members is not without controversy. The list of independent directors across a clutch of companies at any given time reads like a roundup of the usual suspects. Moreover issues like the age and tenure of these directors are also being actively debated by corporate governance committees, notably the one set up by SEBI and headed by Infosys Chairman N.R. Narayana Murthy.

Believers in the laissez faire regime like Harsh Goenka, Chairman, RPG Enterprises feel that issues of age and tenure are best left to the companies to decide. And the issue of picking people from the 'buddy club'? "Often you see the same names since they provide the maximum value to a company and have had successful track records. Maybe there is some influence of a network but we are really graduating from that," he emphasises.

Meanwhile companies like Infosys have constituted dos and don'ts for their own execs in terms of independent directorships. For example, Infosys does not permit any of its working board members, barring Narayana Murthy, from taking up independent directorships in private sector companies. "It is just a way to ensure that the working members stay focused on the company," shrugs Nilekani.

Self-policing of this kind should have a ripple effect and is possibly the best way to ensure that the highest levels of corporate governance are achieved.

Moving On
What do you do when something isn't working out as expected? Well, if you followed the ilabs example you would move on.

Srini Raju, the graying-at-the-edges founder chairman of ilabs, a company that decided to take the software IP (Intellectual Property) route to greatness has just shut down one of the company's units, Ingenovis. And he's handling it in a way that must surely serve as a case study for other corporates. After all, given that Ingenovis developed a unique software product in association with Hyderabad's hoary Centre for Cellular and Molecular Biology, Raju is allowed a little grieving. That isn't what you are likely to encounter. "The story of genomics-related businesses is quite similar to the artificial intelligence of the early 80s and e-commerce in 2000. They all came with a big promise, but did not end up as big business opportunities. They are still happening but the size of the market and far from big." Raju goes on to claim that the total revenues of all bioinformatics companies in the world aggregates $200 million and that ilabs had to choose between fighting for a piece of this or looking at other areas. The company chose to do the latter. The areas it will now focus on: telecom, animation and news channel. ''The way an investor looks at a company is quite different from the way a founder views it,'' says Raju. "The difference lies in the availability of choice and we had the choice to pull out and invest in other opportunities and we did.'' Only, this was a case of the founder, not an investor doing so. That must surely rank as a first of sorts in India.

-E. Kumar Sharma