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Institutional EYE

Commentary on Corporate Governance Issues

IiAS’ recommendation to vote against Prof Jeffrey Lehman’s reappointment as an independent director

Infosys Limited (Infosys) today filed its response with stock exchanges on voting recommendations made by proxy advisory services firms regarding the resolutions that Infosys is presenting in its recent postal ballot.

In our voting recommendation report, IiAS had recommended that shareholders vote against the reappointment of Prof Jeffrey Lehman has an independent director. Our contention was that the Prof Lehman’s tenure on the board will cross 10 years in April 2016, and therefore, he must not be categorized as an independent director. Should the company have presented his reappointment as a non-independent director, IiAS would have likely supported such a recommendation.

There has been considerable debate on director tenure, both in Indian markets as well as globally. Global markets are considering fixing directors’ tenure, and some markets are even considering setting it at 9 years. But, the debate is mainly limited to whether there must be a fixed tenure or not – that directors need to be periodically rotated has always been considered a good governance practice and has never been in question.

Indian regulations and Indian markets have accepted the need to fix a limit on director tenure. The Companies Act 2013 has set independent directors’ tenure at a maximum of 10 years (2 consecutive terms of 5 years each). The only difference between the Companies Act 2013 and IiAS’ Voting Policy is from where the count begins – IiAS believes tenure must be counted from when the director joined the board, while the Companies Act 2013 begins counting director tenure from when the Act came into force (1 April 2014).

While the Companies Act 2013 made it a mandatory requirement, this was not the first instance where the Indian regulators have prodded companies to cap the tenure of independent directors. Before the Companies Act 2013 came into effect, Clause 49 of the erstwhile Listing Agreement recommended that independent directors’ tenure be voluntarily limited to 9 years. The MCA Corporate Governance Voluntary Guidelines were even more stringent: the guidelines stipulated a voluntary tenure limit of 6 years for independent directors.

IiAS’ Voting Policies are based on global best practices that can help Indian markets develop stronger governance standards. Our policies are revised periodically based on feedback from market participants, results of our research, and other on-going market and regulatory developments. IiAS’ voting policy on independent directors’ tenure has changed. It was earlier set at 9 years, which followed SEBI’s Listing Agreement. Following the Companies Bill 2012 (which was subsequently passed by the President as Companies Act 2013), IiAS changed its voting policy to set independent directors’ tenure at 10 years. In a 2014 IiAS survey on ‘Institutional Investors’ Attitude to Corporate Governance’, 82% of the investors polled favourably to setting a fixed director tenure.

Independent directors’ tenure is an element of concern in Indian markets. A 2015 IiAS research paper ‘Board Effectiveness: Through the Looking Glass’ revealed that if independent directors with a tenure of more than 10 years were considered nonindependent, 54% of S&P BSE 500 boards would not be compliant with board composition requirements. Therefore, while making voting recommendations, IiAS recommends that independent directors with a tenure of more than 10 years be reappointed, but in a non-independent capacity – and companies must add independent directors to ensure an appropriate board composition.

IiAS believes instead of debating the legality of Prof Jeffrey Lehman’s reappointment, Infosys would be better placed in assessing what it should do as a good corporate governance practice. Infosys has always looked at the bigger picture and set its standards on good governance well ahead of corporate India. Why, then, has it begun nitpicking on as obvious an issue as director rotation?

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