I think the first category of companies are not finding it
difficult to get the independent directors as they are looking for true trouble
shooters and expert professionals to come on the Board whereby reputation of
both, the company and the director, will be elevated by such person coming on
the Board. Such directors are well remunerated and spend reasonable time in the
committees and the Board meetings, asking all odd questions and seeking
clarifications to ensure that the company does not knowingly take any decision
against the interest of any of the stake holders. There is a misconception that
independent directors are sitting on the Board only to take care of the minority
shareholders’ interest. Legally that may not be the correct position.
Independent directors are expected to use their experience and professional
skills to take care of the interest of all the stakeholders, i.e.
shareholders, suppliers, customers, employees, regulators and the society at
large. Thus decisions like payment of dividend need not be looked at if they
benefit majority or minority shareholders but need to be verified with general
principles of the dividend payments, cash outflows, payout ratios, etc.
The second categories of companies generally appoint their ‘own’, ‘known’, ‘friendly’ independent directors. These directors are expected to create least resistance in the Board meeting on any proposal that promoter may bring in. If the family or group does not hold majority stake in the company, they are more careful while appointing independent directors. Though. the law prescribes the criteria of independent directors, such promoters like to have supportive board members rather than trouble-shooters. Thus, though these companies seemingly comply with the Board composition requirements, the independent directors may not act independently as expected by law and regulators. The paperwork of the board may be kept compliant with all the laws and regulations but in spirit, the Board may not be performing their expected duties. The public shareholders need to be more vigilant while investing in such companies.
The third category is more interesting. As per earlier SEBI observation, maximum non compliant companies to clause 49 so far as Board composition is concerned, were PSUs. The enormous delays in appointing independent directors by respective Government departments or ministries on PSU Boards were quite glaring. Here the independent directors are ‘nominated’ by Government who also happens to be the majority shareholder of the Company. How can one be sure that such directors nominated by the majority shareholders can act as independent directors? This particular point was raised at a few forums in front of Government officials but is never satisfactorily answered to my knowledge.
SEBI as the custodian of the shareholders’ interest, appointed various committees to advise on the Corporate Governance. Kumarmangalam Birla Committee (1999), Naresh Chandra Committee (2002), Narayan Murthy Committee (2003). Every report added a few more suggestions on Board composition, Board Remuneration, Board meeting Pro-cedure, disclosure of Directors’ interests, code of conduct for the Board and definition of independent directors. However, the law has sufficient scope for the improvement based on practical difficulties. While all the committee reports have the same objective of improving corporate governance, what needs to change is the mindset of the promoters and the independent directors. Legally one may’ qualify’ as independent director but what is important is if such person indeed acts independently and asks right probing questions. I think, currently importance is given more to ‘form’ than ‘substance’ and that has its own repercussions. On one side the independent directors of Satyam get clean chit while those who were members of the Board of Nagarjuna in 1999 get arrested in 2009 !
Liabilities of the Board Members:
Every law needs to have punishments and liabilities prescribed to ensure that the law is complied with. The economies in United States of America thrived due to various reasons, but one of them was promoters and owners had limited liability. This allowed them to take risks in the business. Some failed but many flourished. Post Enron, the laws like SOX put the limited liability concept to an end. The CEO and CFO of the company now are personally liable for various things. More than the actual liability, the fact that one is vulnerable to such draconian fines and/ or arrests has literally made senior management paranoid about day to day business of the business that they run. No business can progress when the Board, CEO and CFOs are running business in paranoia. In India, we are entering similar scenario after the non executive Board members were arrested in 2009 for something to the best of their recollection happened in 1999 or prior to that. Satyam is another example. While the law and regu-lators moved very quickly against the culprits, the fraud was disclosed by the confession letter from one of the promoters. Till then, even the Board, the regulators and the auditors and senior management of the company and the market analysts, who tear your numbers every quarter, had not doubted that the company had serious problems to the extent of Rs.7000 crores. On the other hand, the company was growing normally and receiving corporate governance awards! I think both these instances have put many independent directors in dilemma. I have seen the changed atmosphere in the Board meetings post Satyam. The questions that are asked to the Auditors are as basic as if they verified Bank Statements! This fear is forcing many independent directors to resign from their position.
In the recent past, independent directors were perceived as playing a passive role in the company. The recent resignation phenomenon may not be because the directors suspect any messy stuff in the company but god forbids, if there are skeletons in the cupboard, your reputation is at stake. The job of the Directors is truly becoming difficult. For mere Rs.20,000 sitting fees per quarter, it may not be worth making one vulnerable to bad publicity, financial fines and may be arrest. In reality, as independent director, one spends a few hours in the quarter in the Board room. The audit committee spends a few more hours with CFO and Auditors and goes through what is presented to them. With their experience, they can ensure that there does not seem any apparent wrong in the numbers and there is no ground not to believe the numbers based on variances and QoQ and YoY analysis. In the current recessionary conditions, many directors may suspect that the managements and promoters may have more tempting reasons to take extra business risks and do any unacceptable adjustments in the numbers. Such distrust might have made many sitting directors very uncomfortable. These circumstances taken together might have led to a situation where companies are finding very difficult to get independent directors on the board.
Having said that, the past track-record of directors being held liable for actions of the company favours independent directors. In an influential series of studies carried out across several countries (though not including India), it was found that the risk of liability on independent directors is far lower than what commentators and directors themselves believe. Even in a litigious society such as the U.S., it was shown that there were only a handful of cases where directors in fact had to make payments (and these include the high profile Enron and WorldCom settlements). The researchers show that these were cases where there was a ‘perfect storm’ scenario (e.g. where the company was in bankruptcy, the D&O insurance was inadequate, and so on), unlikely to occur in most circumstances. However, independent directors are indeed concerned not about direct financialliability but the time, cost, lost opportunity and reputational risk that accompany the mere initiation of legal action against them, even if that action does not succeed in the end. In the past the financial liabilities under company law were insig-nificant and in most of the cases, matters used to get settled between company secretary and the regulators without directors even being aware of it. However, now fear of arrest/imprisonment has really put a lot of scare in the minds of people. For example, the Chairman of the Audit Committee can be arrested for not attending the AGM. Empirical study may not reveal alarming examples in India in the past but the current instances make one feels vulnerable. On February 1 of this year the cn has made the representation to the Parliamentary Standing Committee on the subject suggesting that the liabilities of independent directors should be handled in a different way than that of the executive directors or non independent directors as independent directors are not involved in the day-to-day working of the company. Unless personally involved, there should not be any criminal liability attached to independent director.
Peculiar Indian scenario:
In a few international studies, India was found culturally in a unique situation. I am sure countries like Japan also would fall under similar situation. The study observed that in most of the cases in India, Chairman/Chairperson of the Board is a very senior (both by age, stature or experience) and hence it is not considered prudent to question the Chairman in the meeting on any matter. This kind of culture restricts the independence of a director. If you are an independent director, and if you feel the decision that is sought by the Board is not in the interest of the stakeholders, you must raise the point and question the decision. In the process of Board discussion, you may get convinced or you may convince the board. But having no discussion as a part of the culture is very harmful for the corporate governance process in the company.
A similar situation is observed in the PSUs as well. If the independent director, appointed by the Government is a person junior to the Chairman (which is normally the case), he or she does not contradict or question the Chairman of the Board. His or her organisational hierarchy comes in the way and prevents him/her from questioning the Chairman in the Board meeting.
I have seen in some cases where such directors discussing a situation what they call ‘off line’. However, such practices are not healthy from corporate governance point of view. Such discussions also do not get recorded in the minutes of the Board and hence are forgotten about later. I feel, once you are sitting on the Board, you are personally responsible for all the acts of the Board and one must act to the best of his or her ability to ensure that healthy, transparent and useful discussions take place in the Board irrespective of your positions outside the Board.
Going forward:
I think, globally, we have same issue on independent directors. The mind set of the person getting appointed as director must be of one to act without fear or favor. If in your professional capacity, you feel the company is not acting in the interest of the stakeholders, you must question such actions and ensure that they are recorded in the minutes. We may not overcome the problem overnight but to slowly get over this issue, I have following quick suggestions-:
1. Independent Directors must be appointed/ nominated by a separate meeting of the minority shareholders, not representing the majority investors. A separate meeting of such minority shareholders must be conveyed prior to the AGM to nominate such independent directors and AGM should formally appoint such independent directors. The majority shareholders should not play any role in such appointments directly or indirectly. Any vacancy of the Board seat between two AGMs may be filled in by other independent directors continuing on the Board like Additional Director.
2. To ensure that the independent directors spend adequate time, they must be compensated well. Mere sitting fees of Rs.20,000 is obviously not enough. Such fees can be capped based on profits of the company or can be a fixed sum.
3. Independent Directors should not get any options. Having options, generally may affect their independent status.
4. Chairmen of the committees must be a rotating position. At least in three years, a new member must be appointed as chairman of Audit /Compensation committee. Such provision would help a board to get new and fresh views.
5. Liability of independent directors should be distinguished from the executive directors and non independent directors. No criminal liability should be attached to independent director for the acts of the company or other executive directors unless the independent director has personally committed a willful criminal act. This obviates the situation where independent directors can not be arrested unless personally and willfully involved in a criminal act.
I feel, the above changes will bring some sanctity in the process and intent of having independent directors on the board.
Post Satyam, it is not only necessary that culprits are punished quickly but also the process is cleansed to achieve intended results that regains investors’ confidence in Indian Companies.
