A matter of governance: When independent directors call it quits midway

On December 12, power trading company PTC India made an exchange announcement about the resignation of four independent directors. The executives' letters flagged governance issues, though the New Delhi-based company denied lapses.

Independent directors quitting midway appears like an exodus, shows an analysis of data from primeinfobase.com. The tracker registered 400 independent directors resigning before the end of their tenure in 2022, or over seven every week as seen in chart 1 (click image for interactive chart).

An independent director acts on behalf of shareholders and protects their interest in a company. Many have been held responsible for not doing their job adequately, even as some suggest that they have limited powers to influence company decisions.

Most independent directors who quit do not explain why they are leaving before the end of their terms. Nearly two-third of them cited preoccupation or personal reasons for the exit. Some provided no reason at all, though increased scrutiny has reduced such cases. Around 2.8 per cent of mid-term exits didn’t cite reasons in 2022, compared to 6.6 per cent in 2020.

Independent directors also cited old age, health and change in management as reasons for their exit.

A gender break-up of the exits shows an interesting trend. The number of women independent directors, who are a minority in boardrooms, resigning before their tenure is increasing. There were at least 114 such exits in 2022, according to Prime’s numbers. There were 87 in 2020. The share of women independent directors in such resignations has gone up from 23.8 per cent in 2020 to 28.6 per cent in 2022 (chart 3).

Women independent directors are leaving when Indian companies are struggling to increase their representation in boards. Women held 24.5 per cent of independent director positions in National Stock Exchange companies, shows Prime’s data. It is 19.3 per cent if one includes all director positions.

Many large economies have higher representation of women on company boards. The US is at 29 per cent, United Kingdom at 35 per cent and France at 45 per cent, shows data from a 2021 report by financial services group Credit Suisse Group.

Governance issues come up during downturns, like the collapse of India’s Satyam Computer Services after the global financial crisis of 2008. Sluggish growth can’t paper over the cracks in governance.

A global recession is feared in 2023. If companies struggle then, the exit of independent directors could be the canary in the coal mine.