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January 17, 2025
Appointment-Reappointment of Non- Executive Director: What Shareholders Should Know - MMJC
Introduction
The appointment and reappointment of Non-Executive Directors (NEDs) play a crucial role in corporate governance, as outlined by SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR), particularly Regulation 17, which mandates a balanced board composition with at least one-third independent directors. This framework is designed to enhance oversight and maintain a separation of powers within the board.
Proxy advisory firms raised concerns about the appointment and reappointment of NEDs, focusing on issues like transparency, conflicts of interest, and too much control from promoters, which can affect the independence of the board.
This article will look at these concerns, using tables to outline the governance challenges linked to NED appointments and reappointments, emphasizing the need for strong governance practices.
- Governance Concerns: The table below lists the common concerns identified:
| Sr. No. | Concern Type | Description | Examples |
| 1 | Low Attendance | Non-executive directors failing to attend the majority of board meetings, affecting effective oversight. | A director attended only 30% of meetings in a year, questioning their ability to contribute meaningfully. |
| 2 | Holding Multiple Full-Time Positions | Non-executive directors holding full-time roles in multiple companies, raising concerns about their contribution at board meetings. | A director was serving as a full-time executive in three companies simultaneously, limiting their attention. |
| 3 | Skewed Remuneration Practices | Compensation practices that do not align with industry standards or company performance. | A company paid non-executive directors 5x the industry average, with no clear basis for such compensation. |
| 4 | Conflict of interest | Non-executive directors involved in transactions with related parties, posing conflicts of interest. | Director having financial interest in a vendor who was awarded a major contract, raising questions of impartiality. |
| 5 | Non-compliance with Articles of Association (AoA) | Directors not adhering to the stipulations outlined in the company’s AoA. | A director was appointed without following the procedural norms specified in the AoA. |
| 6 | Board effectiveness | Lack of clear and adequate disclosure regarding director actions, compensation, or conflicts of interest. | Company was seeking shareholders’ approval for the reappointment of Mr. X as a Non-Executive Director (NED) who had earlier served as managing director. While his profile and attendance record of NED were satisfactory, proxy advisors still raised governance concerns over his re-appointment. Proxy advisors highlighted that during Mr. X’s tenure as Managing Director, three Independent Directors had resigned, citing reasons of misalignment with the company’s strategic decisions. These resignations of Independent Directors had cast a doubt on governance practices of the company. |
| 7 | Failure in Minority Shareholder Protection | Decisions taken by non-executive directors that disregard the interests of minority shareholders. | Concerns have been raised regarding Mr. A’s reappointment, as he represented an investor group involved in a preferential issue proposal that attracted regulatory intervention due to potential favouritism. As a result, all 12 board members, along with the company, were required to face prosecution by regulator. Although Mr. A did not vote on the preferential issue proposal, proxy advisors believe his role may have influenced the decision, implying that his fiduciary duty to all shareholders was compromised. As a result, they are opposing his reappointment. |
| 8 | Undermining of Role of nomination and remuneration committee | Concerns raised on appointment of NED as the institution he was representing had right to appoint 2/3rd of directors. | The company sought shareholder approval for the appointment of Mr. L as a Non-Executive Nominee Director, nominated by N, which has the right to appoint 2/3rd of the board members. Proxy advisor highlighted that this significant promoter control undermines the role of the Nomination and Remuneration Committee (NRC). While the NRC is intended to identify and recommend qualified directors, the rights granted to N may limit the NRC’s function to merely approving nominations rather than exercising independent judgment. This situation raises concerns about the effectiveness and independence of the NRC, despite compliance with legal requirements. Proxy advisors emphasizes that such disproportionate board control could weaken governance standards. |
| 9 | Profit-Sharing Agreements | Concerns regarding directors being party to profit-sharing agreements that lack transparency and pose risks. | The company sought shareholder approval for the re-appointment of Mr. K as a Director. While there are no major concerns regarding his profile or attendance, proxy advisors raised significant issues regarding a profit-sharing agreement between A Ltd and the promoters of the company. Proxy advisors also stated that profit-sharing agreement was not adequately disclosed to shareholders, limiting transparency. The agreement may encourage promoters to prioritize immediate financial gains over long-term company grow |
| 10 | Directorship in Competitor Companies | Issues identified with directors holding positions in competitor companies that create conflicts of interest. | Instances where directors hold roles in competing firms, raising concerns about potential leakage of sensitive information. |
| 11 | No Cooling-Off Period | Concerns when the appointment of a non-executive director indicates a loss of independence without a cooling-off period. | Instances where non-executive directors are re-appointed without a cooling-off period following their tenure as independent directors. |
| 12 | Sub-judice Matters | Concerns arise when directors are involved in ongoing legal cases, affecting their suitability for board positions. | The company seeks shareholder approval to reappoint a director despite his recent legal issues. He was arrested by Enforcement Directorate in November 2022 for transactions involving his personal entities, though not directly related to the company, and was later pardoned for cooperating in the investigation. Following his arrest, the company relieved him of executive duties, citing a “temporary inability to perform.” The proxy advisor questions why he remains on the board if he cannot perform executive duties. Although there is no legal barrier to his reappointment, the proxy advisor expresses concerns about appointing individuals facing serious charges and refrains from supporting his reappointment until the matter is resolved |
| 13 | Non-compliance with Approval for Articles of Association Post-IPO | Failure to obtain shareholder approval for Articles of Association after an IPO, affecting governance. | Company had sought shareholders’ approval for appointment of Ms. S as Non-Executive Director not liable to retire by rotation as per Article 102 (d) of Part A of the Articles of Association of the Company. Proxy advisors stated that clause 102(d) of articles of association states that, “After the consummation of the IPO, A ltd will have the right to nominate 1 (one) Director on the Board as long as A ltd continues to hold at least 10% of the shareholding of the Company on a fully diluted basis, subject to such right being approved by the Shareholders of the Company by way of a special resolution after the Consummation of the IPO in accordance with Applicable Law”. Therefore, unless the above Clause of the AoA is approved by shareholders through a special resolution, articles 102 is not in force. Hence, any appointment pursuant to such clause shall be void. Further proxy advisors highlighted that appointment of Ms. S is not liable to retire by rotation. Therefore, she will be appointed for perpetuity since the company has not mentioned any specific term for his appointment and she is not liable to retire by rotation. Proxy advisors stated that appointment of a director for perpetuity defeats the basic objective of evaluation of performance asa prominent parameter for reappointment, as the director in question would continue regardless of her performance, NRC / Board will have no role in this regard. |
Conclusion
In conclusion, the appointment and reappointment of non-executive directors are vital for ensuring effective governance in a company. Shareholders must be vigilant and consider the various concerns outlined above when voting on these matters. Addressing issues such as transparency, conflicts of interest, and compliance with regulations is essential for maintaining board independence and protecting shareholder interests. By fostering strong governance practices, companies can build trust with their shareholders and enhance their long-term success.