As a result, many SOE Boards tended to be dominated by middle-level civil servants, few with relevant technical or commercial experience. Typically, the same civil servants would sit on many Boards, diluting their capacity to monitor corporate events. The implicit role of Board members became to protect the interest of their ministry, a task often at odds with bringing efficiency improvements. Boards were seldom provided with any role in the selection of management. Even where targets of performance were set, inadequate explanations for shortfalls in performance were not questioned. Many politicians and public officials in developing countries have used SOEs to provide gifts (transport, housing), Board membership, jobs for themselves relatives and supporters, and in some cases even procurement kick-backs.

On the basis of these factors, whereas Board composition and independence are certainly a very important ingredients of corporate governance reforms, procedural rules also have a role to ensure that directors are empowered so as to make a contribution to the Board functioning. Additional requirements may need to be put in place to avoid having “passive” directors. A particular problem that seems to be emerging in developing countries is the excessive turnaround of directors which does not allow them to exercise any influence in corporate events (see Box 2).

## **<mark>Box 2</mark>**

## **<mark>The Case of West Bengal Power Sector Restructuring</mark>**

<mark>The experience in the power sector of a number of Indian states shows that many times directors are removed before completion of their terms without any form of explanation. To prevent such occurrences, in West Bengal a process of removing directors was also incorporated as part of the Article of Association of the newly established unbundled entities. The minimum tenure for directors was specified as 3 years to provide stability and certainty.</mark> <mark>The provisions on number of directors established the composition of Board of directors as described below: i) at least 50% of the directors non-executive Directors; ii) at least one-third of the directors will be independent directors; iii) subject to the above, the Government may nominate the remaining directors on the Board of the company being either executive or non-executive directors. A selection process was also outlined for selection of both functional and independent directors in the Article of Association.</mark> _<mark>Source:</mark>_ <mark>Khanna and Vagliasindi (2007)</mark>

# **3. Composition of the Board and Independence**

Policymakers in several countries have turned to independent directors as an important element of legal and policy reforms in the field of corporate governance both in developed and developing countries. This has translated into many codes and best practice recommendations requiring the introduction of a minimum percentage of independent directors both for the Board as a whole as well as for some sub-committees, with particular reference to the audit committees.

Britain’s own set of corporate scandals led to one of the most influential reports, the Cadbury Report, which recommended, along with subsequent similar reports and studies, a greater role for outside and independent directors. The last decade has seen a number of corporate law reforms in Japan designed to enhance the role of directors and auditors not tied to management. In the United States, insider-dominated Boards have been rare for years. Although the New York Stock Exchange 4