A whopping 92 per cent of Indian respondents in a survey by global consulting firm Ernst & Young said they were concerned about personal liability for things that went wrong with the company on whose board they sat on. According to Ernst & Young’s Eleventh Global Fraud Survey, 92 per cent of directors in India are concerned about their personal liability. Of them, 64 per cent say they are ‘very concerned’ and 28 per cent say they are ‘fairly concerned’.
“This may be because their personal assets are at risk and their hard-earned reputation is at stake in the corporate world,” the consultancy said in the report.
The concern in India was higher than the global average. Across the globe, 76 per cent of the respondents were concerned about their potential liabilities. Indian results were also higher than 87 per cent registered by respondents from the Middle East and Africa. The study had 1,409 respondents globally.
The larger concern in India was attributed to the lack of distinction between independent and executive directors. “The corporate governance structure in India hinges on the independent directors, who are supposed to bring objectivity to the oversight function of the board and improve its effectiveness. Members place high expectations on them to ensure that the company is run effectively,” the study said.
However, the problem is that an independent director cannot play an effective role in isolation despite their commitment to ethical practices. They cannot stop a decision that is detrimental to the members individually, but if they act collectively, then they can act prudently before arriving at any such decision.
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“The regulatory environment in India around corporate governance is changing rapidly and those entrusted with governance, i.e., the Board of Directors and the Audit Committee are being made responsible for the prevention and detection of fraud,” said Arpinder Singh, partner and national director, Fraud Investigation & Dispute Services, Ernst & Young. “The real question is, since independent directors only play a supervisory role, should they be penalised only in the event of a discrepancy that directly relates to their responsibilities?” Singh asked.
In-depth interviews with experts in the field suggested that the need of the hour is for the legislature to draw a line between independent directors and executive directors by defining their roles and responsibilities, and demarcating their liabilities. “There should be a general law, which clearly defines the roles, responsibilities and liabilities of regular executive directors of the company managing day-to-day affairs of the company and non-executive directors /independent directors,” said M L Bhakta, senior partner, Kanga & Co, one of the legal experts interviewed by E&Y.
The Companies Act, 1956 does not make an obvious distinction between the accountability of an independent director and an executive director. Independent directors are included in the definition of an “officer in default” under Section 5. A new companies bill is pending in parliament, which contains provisions that may address some of these concerns.
