The devastating fire at the Dhakuria (Kolkata) unit of the Advanced Medicare & Research Institute (AMRI) Hospital, which broke out on December 9, 2011 and killed 93 people, has led to the arrest of the members of the board of directors, who represent the two companies, which have significant shareholding in AMRI. All of them have been charged with culpable homicide not amounting to murder and negligence under the Indian Penal Code. The stories being published in media, based on police investigation, which is yet to be concluded, have thrown open many corporate governance issues.
The shareholding pattern of AMRI is as follows: Emami (a midcap listed personal care and health care company): 64.5%, Sharchi (a listed infrastructure and finance company): 33.4%, State government: 1.99%, and others: 0.11%. The board of directors has two government nominees. The license of the AMRI Dhakuria was issued in the name of Prof. M K Chhetri, a noted cardiologist of Kolkata. Prof. Chhetri is the Managing Director of AMRI.
AMRI had seriously violated the fire safety norms. Government officials (fire department) inspected the hospital before issuing the ‘no objection certificate’ (NOC) on August 29, 2011. They found lack of preparedness to fight fire. The fire department gave three months time to the hospital to put the house in order. However, the AMRI management did not do the needful.
The board of directors is responsible to ensure compliance of laws applicable to the company. The board of directors of AMRI had failed in this respect. The question is how should the board of directors of a company ensure compliance? Directors are not expected to know all the laws applicable to the company, the number of which may touch 300 in some cases. It is difficult, if not impossible, for the directors to know cases of non-compliance unless they are provided information on non-compliance by the executive management. The only alternative is to rely on the internal audit report.
As reported in the media, the protocol in AMRI was that in case of fire, the internal staff should make all efforts to douse the fire. Fire brigade should not be informed of a fire immediately. The standard protocol is to inform the police and the fire brigade immediately when a fire is spotted. Presumably, the management was aware of non-compliance and therefore wanted to avoid visit of the fire brigade, which is necessarily required to submit a report on the compliance of fire safety norms. The board cannot get into the details of Standard Operating Procedures (SOPs). Therefore, the board should insist for periodical review of the same by the internal audit or an outside agency.
It is imperative that the independence of the internal audit and the effectiveness of the board process are paramount in improving the effectiveness of the board. It is the board’s responsibility to ensure audit independence and to set an effective board process.
More From This Section
It is reported in the media that Prof. Chhetri, who is the managing director, was not involved into the day-to-day management of the company. He did not take any administrative decisions. Although, this might appear surprising that the MD of a company did not take administrative decisions, it might happen when a company appoints a technocrat, without managerial capabilities or aptitude at the helm of affairs. Another view may be taken that Prof. Chhetri had lent his name for the benefit of promoters of the company.
Although, there may not be many instances where MD does not take administrative decisions, many well-known technocrats and professionals join boards as independent directors. They either lend their name or take interest only on issues that relate to their specialization. This is unfortunate. The board is collectively responsible for the governance of the company. Therefore, each independent director should understand the business well and should have adequate knowledge to appreciate management issues. In absence of that, independent directors do harm to non-controlling shareholders and other stakeholders rather than protecting their interest. This is the time that independent directors understand their accountability to stakeholders.
AMRI has earned a reputation of a well run hospital with high quality of service. The board has failed to appreciate the reputation risk. It did not pay attention to risk management and to the responsibility of ‘setting the tone at the top’.
AMRI is an unlisted company. But the situation is not much different in many family managed listed companies.
E-mail id: asish.bhattacharyya@gmail.com Affiliation: Director, International Management Institute - Kolkata