Why are Independent Directors increasingly leaving board seats?

In recent times, resignation of Independent Directors from Company Boards have become a trend. In most cases, without providing a clear explanation. In cases where an explanation has been provided, the main reasons behind such resignations stem from poor corporate governance and a lack of transparency in board matters. Even when the authorities tightened up on corporate governance, there has been a pattern of independent directors quitting with a statement about their resignation related to corporate governance.

Our Views

• Since SEBI took the step of directing Independent Directors (IDs) to make greater disclosures and adhere to corporate governance rules, IDs have started to publicly voice their disapproval on company boards on many occasions.
• SEBI has also introduced an amendment to SEBI LODR in October 2023 which states that the Independent Directors who are resigning should provide the detailed reason of the resignation. The aim is

a. To ensure effective Independent Directors join boards of companies to protect minority shareholders’ interests

b. To strengthen corporate governance by enhancing the accountability of Independent Directors, and

c. To enable the market regulator to track the instances of critical issues which would demand attention.

• The amendment also stipulated that an Independent Director must give a resignation letter that clearly outlines their reasons for leaving, with the requirement that the letter include no more information.
• This necessitates a culture where Independent Directors feel empowered to express their viewpoints, raise concerns, and articulate their expectations regarding governance, transparency, and ethical conduct.

1,471 Independent Directors of NSE – Listed Companies resigned last year [CY 2023], out of which only 7 cited non-cooperation or disagreement with management as reason for their resignation.

• In view of the aforementioned, it is likely that the trend of resignations may continue in the near future, especially in light of the directives issued by SEBI w.r.t. mentioning of the detailed reason by the Independent Directors about their resignation in the letter to the board, for a better corporate governance culture and a persistent sense of trust, accountability, and transparency among shareholders.