Former Sebi chairman backs increased fee for directors | Company Business News

Recognizing the increased responsibilities of the Board and the directors and longer number of hours required for productive Board meetings, M. Damodaran, former chairman of the Securities and Exchange Board of India (Sebi) recommended increasing the sitting fees of directors.

“If directors are expected to commit quality time, and to contribute to improving corporate performance, it is necessary to compensate them appropriately for attending meetings,” the fifth edition of the report by Excellence Enablers, an initiative by Damodaran noted.

“It would be appropriate for more companies to increase the sitting fees to ₹1 lakh per meeting. This might also persuade persons who can add value to the Board, but are staying away from Boards, to reconsider their position vis-à-vis Board directorship,” he further said in the report.

In FY24, only 29 of the 72 companies considered for the survey paid ₹1 lakh in sitting fees to directors, data gathered by the report showed. The highest amount paid to directors was between ₹21,000-50,000 by 34 companies in FY24.

As per Rule 4 of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014, a company may pay a sitting fee to a director for attending meetings of the Board or committees, which is a sum decided by the Board of directors and does not exceed ₹1 lakh per meeting.

Committee meetings

The report noted that Board committees should take almost as much time, and at least as much incisive analysis, as meetings of the Board. Accordingly, the time has come to enhance the sitting fees for the meetings of at least these committees significantly, keeping the statutory limit in mind.

The directors ought to be suitably compensated for their contribution towards the performance and profits of the company, and the law has envisaged the payment of profit linked commission to different categories of directors, the report said.

“While the statutory ceiling for the amount of profit linked commission to be paid to non-executive directors (NEDs) is 1% of the net profits of the company, the actual amounts paid, especially to independent directors (IDs) in some cases, falls woefully short of this prescribed limit,” it said.

The report recommended that companies need to revisit the amount of profit-linked commission paid so that directors of acceptable quality are enthused to join Boards, and to stay on as stock options are no longer available to independent directors.

“Good IDs, who commit valuable time to the company, need to be appropriately compensated, in the interest of the company. Deciding on a number as the total amount of commission to be paid, and using only a part of that amount for compensating IDs, is an unacceptable proposition. From the amounts derived as a percentage of profit, a significant amount should be set apart for compensating IDs, so that their involvement in the affairs of the company can be ensured,” it said.

More than 4 meetings

The report also shows that most companies have exceeded the minimum of four board meetings in the last four years.

While the minimum number of Board meetings prescribed by law and regulations is four, Damodaran recommended at least six Board meetings to be able to extract more value from the Boards.

The survey is based on the annual reports or stock exchange disclosures or the websites of the Nifty 100 companies.

In FY21, 86.5% of Board members had 100% attendance, which reduced to 74.7% in FY24, the report noted.

The report added that as on 31 March 2021, 21 companies (of which 14 were public sector undertakings and five were public sector banks), 3 PSUs had no independent directors (IDs). The number of companies that were non-compliant, with less than prescribed minimum number of IDs reduced to four in FY24.

As per Section 149(4) of the Companies Act, 2013, every listed public company shall have at least one-third of the total number of directors as independent directors.

Average age of directors

Given the pace and the nature of change in the economy and in the corporate world, induction of younger persons on the Boards will increase the relevance of Boards and make the Boards future ready, said the report, adding that as on 31 March 2021, of the 439 IDs, 32 were less than 50 years. The youngest ID was 35 years, and the oldest was 93 years, it said.

In comparison, as on 31 March 2024, of the 561 IDs, 19 were less than 50 years. The youngest ID was 37 years, and the oldest was 89 years.

Talking about the importance of tenure of directors, the report said that the statutory provision of two terms, with a maximum of 5 years in each term, satisfactorily addresses the issue of tenure of IDs. “As for non-IDs, including those who are liable to retire and to seek reappointment, the total period spent on the Board should not be so short as to make it a mere Board presence, without adequate contribution. At the same time, too long a tenure will lead to staleness, and will stand in the way of inducting newer directors, with fresh insights, and in some cases, more contextual relevance,” it said.

From the date of first appointment, the average tenure of 937 directors, as on 31 March 2021, was 7 years, with the longest tenure being 53 years. This slightly changed in 2024, with the average tenure of 1,051 Directors being 6 years, with the longest tenure being 56 years.

As per Section 149(10) of the Companies Act, 2013, an independent director shall hold office for a term of up to five consecutive years on the Board of a company but shall be eligible for reappointment on passing of a special resolution by the company and disclosure of such appointment in the Board’s report.