A recent notification mandates those who have been
independent directors (IDs) for not more than ten years to undergo a
proficiency test. We are told that India is the only country to start the
practice of proficiency tests.
Those desirous of appointment as IDs have to apply
online to include their names in a databank. Increase in the size of a
‘databank’ is good news, when many ‘commercial banks’ are kept afloat with
infusion of taxpayer money. One would hope that such tests will bring to the
databanks, and eventually to the Boards, IDs who will strengthen the
functioning of commercial banks.
Education is generally a welcome step when it is
in the field of one’s operation. Refreshing knowledge and remaining current is
imperative in the times of change and uncertainty.
The Indian education system historically and
chiefly focuses on technical aspects with little emphasis on the eventual
functionality of that knowledge. Knowledge without a clear and direct link to
practical use is futile. I remember a top tech company CEO speaking about how
they hire only seven of 100 engineers interviewed, as the rest were
unemployable in spite of being educated.
The directors’ proficiency tests cover three
specific areas, which are necessary without doubt, but not sufficient. The
areas specified are securities laws, accounting and company law. In addition,
there is a general residual category, ‘other areas necessary or relevant for
functioning as IDs’.
With so much happening in the area of corporate
governance, the role of the Board must be understood well. An institution like
SEBI could institute, on a periodic basis, studies on practices, processes,
challenges for IDs in the Indian context. Such empirical studies could aim to
bring clarity on attributes necessary for an ID in the Indian context.
An ID requires technical competence to even be
‘literate’ enough to decipher and ask questions to the management, and much
more to carry out the function of superintendence, direction and control. Obviously,
the curriculum and tests must match up to equip the ID for the role.
Experience and integrity top all other
qualifications. How to see through data, how to peel through layers by
questioning, how to get to the bottom of things, and how to look for
‘invisibles’ that are not in the routine reports, are some skills that come
from experience. Integrity related aspects include what it is to be
independent, how to see conflict of interest in related party transactions,
distinction between propriety and legal prescription. And then there are even
finer aspects such as the ability to see years ahead. These are attributes that
cannot be taught.
Two challenges before IDs are conflict of interest
and timely availability of reliable information. If the tests could build
capabilities in some of the above-mentioned areas, they would strengthen the
institution of the ID.
Tests may also be the beginning of systematic
regulation of IDs on the lines of other professions. Hearing about an
institute, marks, etc. indicates that eventually there could be CPE too.
Perhaps, ID resignations, like auditor resignations, will be questioned and
regulated.
Reports indicate that in 2018, 606 IDs resigned
(270 without citing any reasons) and 412 IDs have resigned between January and
22nd July, 2019 (107 without citing any reason). The gap between Liabilities
– Duties – Compensation remains a concern. Independence itself has not been
free from controversy, especially in promoter-controlled companies. Many laws
do not make a distinction between an ID and other directors. If the proficiency
test had questions related to statutory, civil, criminal and personal
liabilities, the outflow of IDs from Boards could be rapid in the times to
come.
After all, directors are meant to bring wisdom, counsel
and values, and bat for a strong sustainable foundation of a company. They are
there to look out for and speak up for the interests of non-promoter
shareholders. Let me end with a story I am reminded of while attending a Board
meeting as a young auditor. During the general discussions that often took
place around the fixed agenda, one of the Directors shared a story from a Board
meeting in which the legendary JRD Tata was present. When JRD found that many
dividend warrants were not encashed, he said they should be sent again, as they
used to be sent by post in those days. Management said that they had done what
was necessary as per law, and shareholders could come and claim their dividend.
JRD did not relent, and ultimately prevailed upon the company to do what was
right, and not just what was legally correct.
Raman Jokhakar
Editor
