Dilution of the core principle of accountability will mean double standards, but punishing those who are not directly responsible will deprive companies of valuable talent.
Rajeev Chandrasekhar
Member of Parliament & Chairman, Jupiter Capital
The move will prove counterproductive as it will encourage independent directors to remain unaware and ignorant in their dealings with management
The year 1984 is marked by many unfortunate incidents in India’s contemporary history. The first assassination of a prime minister of the country, the resulting anti-Sikh riots that claimed many innocent lives and the Bhopal tragedy that took an estimated 15,000- 20,000 lives.
There is a common theme to these “incidents” as these significant acts are often described in bureaucratise. In both cases where massive loss of life was involved, no person of stature has been held responsible and punished, while thousands of our countrymen and women have suffered the loss of their loved ones. It is against this background that we need to ensure that Bhopal isn’t another case of sweeping corporate crime under the carpet. The thousands of shattered families in Bhopal deserve to get justice and closure even if the guilty are the rich and powerful.
In our country, public policy is significantly influenced by corporate lobbying and by the so-called icons of industry with hardly any challenge being posed to them. So, it’s not surprising that efforts are under way to soft peddle the concept of corporate negligence by trying to amend the Companies Bill, 1956. The argument being advanced by some chambers of commerce and industry that prosecution of directors of a company will somehow impact the “availability of independent directors” is laughable if it wasn’t so pathetic.
The whole idea of the institution of independent directors is simple. It is up to each company and management to establish trust and credibility to attract independent directors who have the confidence to be on its board. They are expected to be independent from the management and act as trustees of shareholders, which means that they are obliged to be more “aware” and to question the company on issues that are relevant. In other words, independent directors have obligations which they must fulfil. A board of directors is not a cozy club, much as how some promoters would like it to be.
The lobbying by some organisations like the Confederation of Indian Industry (CII) to protect non-executive directors from criminal liability and moves to amend laws to provide them immunity from the laws of the land are not tenable. It suggests that independent directors do not have any obligation or responsibility for the civil/criminal misconduct/negligence of company. This is an unacceptable proposition. They cannot escape this obligation by claiming to be ignorant of what management was doing. This is a universal law and should be so in India as well. The issue of the personal liability of the directors can be addressed separately by seeking indemnification and protection from the company/management/promoters. They can also seek directors insurance to protect themselves as individuals.
But the core principle of accountability cannot and should not be diluted at the behest of a few worried companies. This will prove counterproductive as it will, in a way, encourage independent directors to remain “unaware” and “ignorant” in their dealings with the management. It also reeks of double standards by allowing a privileged group to remain above the laws that govern the ordinary citizens of country.
I was expecting a spin to start in support of this proposition, so I wasn’t surprised by the statement by Deepak Parekh who is quoted as saying, “I agree Bhopal is our worst tragedy. But we can’t get emotional about it. Just by putting a chairman and CEO in jail is not going to solve the problem!” This is an amazing statement and shows just how compromised and lopsided our system is. The hypothesis that is being advanced by Parekh is that we should forget that there was someone culpable and responsible for this negligence simply because he was a chairman or CEO of a powerful company. He is wrong. Why is holding a chairman or CEO responsible for negligence any more special than holding an ordinary citizen accountable? If anyone violates the law of the country and is found to be negligent, he ought to face the consequences.
We cannot allow this double standard anymore. It might have worked for 26 years but not any more. This is the only way to send a message to other lawbreakers. Break the law and you will held accountable. Dilution of the current law will dilute the core principle of accountability and all arguments advanced should be rejected for what they are — a plea for double standards and dilution of accountability.
S Mahalingam
CFO & Executive Director, TCS
Fixing differential liability for independent directors will enable them to function as an effective oversight body, thereby reducing accidents
There is increasing clamour today for meting out punishment to directors, including non-executive and independent ones. While responsibility for any omission or commission needs to rest with the perpetrators, who should society look to punish in a situation where the responsibility for a tragedy rests with a corporation? In ascribing the fault to a non-executive chairman who is an independent director, are we not punishing those who are not in direct line of responsibility? This attitude is already resulting in not getting valuable talent into the board at a time when the country needs to have a large number of companies, actively traded in the stock exchanges.
This debate brings us back to the basic question: What are the responsibilities of the board of directors and, in particular, what is the role that can be played by independent directors? Non-executive directors should contribute to and constructively challenge the development of company strategy. They must scrutinise management performance; make sure that financial information is accurate and ensure that robust risk management systems are in place. It is important for them to meet collectively once a year without the chairman or executive directors.
The key to being a truly effective independent director is time management. A non-executive director should be able to devote enough time to the affairs of the company. The importance of a non-executive director has been underscored by America’s Securities Exchange Commission Chairman Arthur Leavitt who said: “I don’t care how talented you are, you can’t be a good watchdog if you’re only on patrol three times a year.”
Independent directors these days are worried about the issue of potential liability as they are not involved in the day-to-day operations of the company for which they bear responsibility. This fear of the unknown also arises from the fact that they could be held liable for offences related to fraud, safety-related issues and environmental issues. Independent directors are also concerned about the amount of time and money that is lost due to such litigations and more so the risk to their integrity.
However, the excuse that they were ignorant about a fraud brewing in the company should not be reason enough for letting independent directors go free. Indeed, we need to fix their liability as distinguished from that of other directors and executive directors. This would naturally limit the liability of the independent directors.
Various expert committees over the years have clearly delineated the roles and responsibilities of independent or non-executive director. The Naresh Chandra Committee Report on Corporate Audit and Governance in 2002 said that non-executive and independent directors should be freed from criminal and civil liabilities and should also be indemnified against costs of litigation. The Narayana Murthy Committee Report in 2003 also supported the notion of limited liability and further argued that independent directors should periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint.
Further, no criminal liability should be attached to independent directors unless it is proved that he/she has personally committed a wilful crime. They should be held liable only if they were either in charge of the matter or had knowledge of the offence and failed in their responsibility to ensure compliance.
This differentiation in liability can be achieved if independent directors ask the right questions at the right time. Raising appropriate red flags at the opportune moment would help avoid occurrence of such untoward situations to a great extent. Asking questions assumes utmost significance. One of the most important tools that independent directors possess is the right to insist on a particular agenda and have an in-depth discussion of such items at board meetings. Independent directors should also make sure that the agenda put before them is informative and, at the same time, provides the “big picture” without burdening them with too many details.
If independent directors are able to function as an effective oversight body and monitor the performance of the management, the occurrence of mishaps and crimes would reduce. In such a scenario, independent directors should be seen as part of the solution, and not that of the problem.
For example, when a mishap occurs, independent directors can prove that steps were taken to make sure that a framework was in place and that the reasons for the occurrence of such an event was unsuccessful implementation of such a framework.
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