Directors' responsibility

Since India and the US follow different legal systems, little notice has been taken here of two significant corporate developments in the US.

Both are worthy of note in the context of the issues of corporate governance and shareholder value that are currently being raised in the country.

One is the news that 10 former directors of WorldCom (now MCI) have agreed to pay $18 million out of their own pockets as part of a shareholder lawsuit.

A few days later, 18 former directors of collapsed energy conglomerate Enron agreed to pay $13 million as part of a settlement in a shareholder lawsuit.

Although neither settlement has been finalised yet, Indian readers will be interested to know that Rebecca Mark, who played such a prominent role in the controversial power purchase agreement for the now defunct Dabhol Power Company plant in Maharashtra, is among those who will be paying out.

Considering the millions that board directors in the US make in pay, perks and productivity-linked bonuses, regardless of their companies' fate on the bourses, this should be considered a virtuous development for shareholders who have been at the receiving end of the serial accounting scams""housing finance major Fannie Mae being the latest""that have plagued US corporations over the past few years.

Why should directors, who are party to irregular decisions that eventually impact earnings, go unscathed when shareholders, who have little say in accounting practices, take the hit?

Cases like this are also expected to have far-reaching effects on the quality of corporate governance, not least because they will encourage directors to be more circumspect in decision-making and perhaps dilute the nudge-and-wink cronyism that appears to have become an integral part of USA Inc. in recent times.

Surprisingly, though, not all corporate analysts see such an open admission of directorial liability as a good thing.

Their point is that such pay-outs""in WorldCom's case, it amounts to each of the directors surrendering 20 per cent of their net worth""might ultimately dissuade qualified people from sitting as independent directors on corporate boards.

Despite fairly hefty insurance policies that cover corporate directors, some analysts argue that such settlements increase the risk for independent directors.

A subsidiary point to this is that although independent directors are often granted stock options of the companies they serve and are reimbursed for their time and expertise, they earn a fraction of what leading CEOs earn, so it might be unfair to load them with such heavy liabilities for incorrect decisions.

Either way, both cases clearly signal that directorial responsibilities can no longer be regarded as well-paid sinecures.

For India, the implications of these developments are marginal in strictly legal terms. Under US law, the pay-outs are being offered under the concept of compounding, which does not yet exist in India.

In other words, legal experts point out, even if directors offered to pay out of their pockets in an Indian shareholder suit, it would make no difference to the course of the case. But WorldCom and Enron will hopefully have an impact on directorial conscience.