The Companies Act 2013 has put a limit on the tenure of independent directors to a maximum of 10 years (two terms of five years each)
Institutional Investors Advisory Services (IiAS), a proxy advisory firm, has suggested investors vote against family members of independent directors whose tenures in a company have come to an end.
The proxy advisory firm says investors should avoid voting such family members of tenured independent directors 'unless the board is able to disclose the process it followed (including - but not limited to - the number of candidates considered and the pool from which candidates were sourced), and the criteria used to select such candidates'.
The Companies Act 2013 has put a limit on the tenure of independent directors to a maximum of 10 years (two terms of five years each).
According to IiAS, companies have begun replacing independent directors in a staggered manner, to ensure that by 2024, there are no tenured independent directors. However, it says that some companies in the garb of rotating independent directors have appointed family members (siblings or progeny) of the same tenured independent directors.
The proxy advisory firm says that though it believes family members of an independent director could be equally, if not more, competent than the tenured independent director, and may have an independent opinion on decisions that may not align with the previous tenured independent director, appointing a family member of the outgoing independent director raises concern as it suggests that the board strives to maintain its cozy relationships, which is contrary to the rationale of board churn.
IiAS also suggested investors not to (re)appoint candidates who have been part of two or more board failures.
"Multiple failures in the past provide a reasonable trend for IiAS to conclude that the candidate is unable to discharge their fiduciary responsibility. Here, when we look at corporate failures, we assess only those failures where we believe corporate governance practices were weak - not failures on account of any business or operating risk," it says in latest voting guidelines.