The approach of the West Bengal administration in handling the AMRI episode is resulting in wide spread discontent among industrialists. FICCI has vented that discontent by issuing a statement reflecting its discomfort.
It is reported that on Thursday (January 5, 2012) the Court extended the judicial remand of the six arrested directors and two executives by another 14 days. The Court asked the government hospital, in which another accused director of the AMRI is admitted for treatment, to submit the medical report of that director. Three directors, against whom arrest warrants are pending, have been declared 'proclaimed offenders'. Arrested non-executive directors include those who were not managing day-to-day operations of the hospital. Directors, who have not been arrested, are government nominees and doctors in the board.
Two important questions have been raised: Is it fair to charge non-executive directors, who are not involved in day-today operations, for a criminal offence? Is it not discriminatory that government nominees and doctors, one of whom is the managing director, have not been arrested? The Chief Minister of West Bengal said that the law would take its own course.
The whole episode is unfortunate. It is true that the law will take its own course and will decide whether the directors are offenders under IPC. But the ordeal through which they are going is horrifying and they could not think of the same while setting up businesses. Let us hope that the administration and the Court are not guided by the public sentiments.
The two questions raised by industry associations are pertinent and need deliberations in the context of corporate governance.
The Companies Bill 2011 provides immunity to non-executive directors from offenses under the Companies Act. It stipulates: "A non-executive director not being promoter or key managerial personnel, shall be held liable, only in respect of such acts of omission or commission by a company which had occurred with his knowledge, attributable through Board processes, and with his consent or connivance or where he had not acted diligently". The Companies Bill makes a distinction between non-executive directors who are promoters and other non-executive directors. Other non-executive directors include independent directors. Without going into the details of the definition of 'promoter', we can ask the question whether the level of accountability should be different between two classes of non-executive directors even though they play similar roles in the management of the company. For example, if both X, who is a promoter, and Y are not involved in the day-to-day operations, X will be accountable for an act of omission or commission where as Y will not be held accountable unless it was within his knowledge or it is established that he had not acted diligently. Is it fair? I think it is not fair. Accountability cannot be different for different classes of non-executive directors who have similar roles in the management of the company for the same or similar acts of omission or commission. This violates the moral rules of equity. In the case of AMRI Hospital, the West Bengal Administration is acting with the same mind set with which the Companies Bill 2011 is formulated. The administration is taking actions against those who are related to the promoter groups irrespective of their role in the management of the hospital. The discrimination is obvious.
I have difficulty in making a clear divide between activities related to day-to-day operations and other activities in managing a company. We generally divide decisions into strategic decisions and operating decisions. Operating decisions flow from strategic decisions. Does 'day-to-day' operations refers to the whole gamut of activities carried out by a company to implement strategies? If it is so, then non-executive directors are responsible for those activities because the board is responsible to ensure implementation of strategies. If, day-to-day operations refer to routine activities the board is responsible to ensure that the internal control systems are operating well so that managers do not violate the policies established by the board. Therefore, if there is systemic failure, the whole board, including all non-executive directors, is accountable to stakeholders. It is a myth that board is responsible only for providing directions to the company.
The responsibility of non-executive directors is onerous. Those who decide to join the board of a company assume that responsibility voluntarily. The level of accountability does not depend on whether a responsibility is assumed voluntarily or under compulsion.
Email: asish.bhattacharyya@gmail.com Affiliation: Director, International Management Institute - Kolkata