The government is examining a proposal seeking to split the compensation package of independent directors into fixed and variable components to ensure they play an active role in the affairs of companies. The variable component will be linked to the attendance at the board meetings, an official with the ministry of corporate affairs told to a leading newspaper.
As per the proposal, the fixed part of the remuneration should not be more than 30% of the total package, with the balance being the variable component. The suggestions are contained in the report of a task force set up by the CII at the behest of the government in the aftermath of the Satyam scandal, which had brought the role of independent directors under the scanner.

Independent directors are board members of a company, but are not employees. They are paid for sharing their expertise and knowledge in strategic matters that come up for discussion at the board. They are paid a ‘sitting fee’ for attending meeting, But most of their earnings come from the share of profits earned by the company, given out as ‘commission’ to board members.

The key suggestions made by the task force are being forwarded to the parliamentary standing committee that is examining the new Companies Bill. “The idea is to ensure that directors play a more active role on companies’ boards and safeguard interests of small investors,” said the corporate affairs ministry official, who asked not to be named.

The variable component of an independent director’s salary would be available when he attends at least 70% of board meetings. The new strucutre is expected to help all companies attract the best minds, notwithstanding the profits they generate. With a part of salary being fixed, instead of the present system of drawing remuneration from net profits, the move may allow even loss-making or distressed companies to draw talent.

However, experts believe the remuneration factor is not an issue that affects independent directors. “They are distinguished individuals, and are not worried about what they get. The government should bring them in a comfort zone where they can work,” said a corporate governance expert with a global consulting firm.

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September 2021