While I plead guilty writing on this topic yet again, the concern on the sustainability of the Independent Directors’ role continues to be an issue on which the lawmakers and corporations are not in ad idem. Corporate governance as a concept is necessitated if the extant laws prove to be inadequate. Weak governance manifests itself in lack of transparency, unreliability in financial reporting, creating an environment where principles of conflict of interest are heavily compromised, adversely affecting security market transactions and interests.
In the USA, post the Enron, WorldCom and Tyco scandals, the introduction of the Sarbanes-Oxley reforms was the first concerted effort aiming at creating a regime which went beyond compliances and regulatory filings, aimed at enhancing performance and practices. Sarbanes-Oxley (SOX) introduced new standards for corporate accountability and beefed up the regulators’ and Board’s responsibilities. In India, the direct outcome of SOX was the introduction of the Revised Clause 49 of the Stock Exchange Listing Agreement; the purpose was to rebuild investor confidence, as India had suffered its own stock market scandals in 1992 and 2001. This brought in its wake revamping of the Board room ethos by making the audit committee of the Board members mandatory. For the first time, the requirement of Independent Directors (IDs) on Boards of public companies was introduced, who were to be part of these committees and an eligibility criteria devised for their selection. The changes to Clause 49 were made by a SEBI notification, and were not made part of any law. Thereafter several committees were set up by successive governments for revamping and overhauling the Companies Act, implementing Corporate Governance Reforms, but while the committee reports did the discussion rounds over time the interest waned and the seminars on Board rooms’ ethics become passé.
Effectively, other than some additional filings, Corporate governance implementation was put on the backburner by most corporations, till the next scam hit the headlines and the complacence of ministers and regulators and corporations were jolted.
What was and still has to be recognised is that most companies and their advisors remain quite clueless as to what processes and systems should be in place for proper governance, and how it would be evaluated in the context of performance. The Satyam scandal demonstrated that Clause 49 failed to work – and has reopened the debate on independent directors’ impartiality and its feasibility if such talent is available, and whether self regulation, which was being demanded by companies and being permitted by the law makers has failed miserably. Therefore, the new Bill is loaded with governance norms and provisions, yet somehow the overall picture lacks clarity.
The guidelines are nine in number, and reads like a thesaurus apart from being repetitive. The role and functions also parrot similar language. What makes more sense are some of the duties, such as, the requirement to attend the general meetings, report concerns about unethical behaviour and practice.
What is possibly the positive contribution is that the appointment of both Nomination & Remuneration committees have been made mandatory, which Clause 49 did not provide for. Vesting the appointment of IDs with the promoters is on the other hand could probably translate into cronyism, which is one of the reasons of malaise in Board rooms today.
The Nomination committee, which requires candidates to be recommended to the Board, is expected to bring more objectivity, but the participation of minority shareholders is not envisaged, which perhaps, may not be a bad thing, as it could result in further confusion and mayhem. Other than attending of Board meeting, the independent directors are expected to attend general body meeting as well, but providing these as optional “strive to” is not the same as making it mandatory. IDs are supposed to provide value addition to the company’s performance, and provide mandatory reporting on performance, report concerns about unethical behaviour, actual or suspected fraud, violation of company’s code of conduct and ethics.
This is the critical element of their role and should have been specified in more detail in providing clarity whether the reportings are to be made to the Board and whether the ID in making such reports to a third party would have some whistle blower protection.
The idea of off-site separate meetings for the IDs is an excellent proposition, so long as it does not turn out to be a junket. The evaluation mechanism for their performance has yet to be provided and this has to be not looked at but looked through and in place asap; otherwise, like all other good intentions, the ID’s role will remain where it has been till date, a non starter.
Kumkum Sen is a partner at Bharucha & Partners Delhi Office and can be reached at kumkum.sen@bharucha.in
