Independent directors’ liability not defined

Filed under Corporate Governance |

Deepak Parekh
Companies can pay an annual fee of Rs 20,000 to independent directors , but they can get a slice of profits which could run into lakhs, occasionally even up to a crore. However, that is clearly no longer an incentive for the kind of quality talent that could really enhance a board’s performance – especially when directors are being asked to cope with unprecedented uncertainty.

“Fee is no longer the attraction ,” says HDFC chairman Deepak Parekh, who sits on the boards of companies such as HUL, M&M and Indian Hotels. “People won’t join boards if the liability on the independent director is not well defined.”

Unfortunately, there is lack of clarity on the exact liability of independent directors . A few months ago, the Company Law Board asked the Registrar of Companies not to routinely treat all directors as culpable and to instead focus on whole time directors. In case of fraud, the CLB wants to focus on whether the independent director was party to it or ignorant about it. But Haldea insists, “I think ignorance is almost connivance to fraud.”

Former Sebi chairman M Damodaran believes one cannot hold a non-executive director liable in cases like bounced cheques. However, he adds, “All directors should be held equally responsible for matters that ought to come to the board.”

Sanjay Nayar, India CEO of KKR (a private giant giant ), agrees, “Directors need to be responsible for every decision taken by the board. Independent directors need to play a more active role on boards.”

All this, though, begs the obvious query: Why do some boards fail to perform their core job of asking the right questions? One reason is that the criteria for selecting independent directors continue to be ad hoc. Damodaran warns that there is no point in accepting a board position just because “you went to school with the promoter” . But even today, many directors serve on boards due to personal connections . Gautam Doshi, a career professional, joined ADAG as group managing director as he was known to Anil Ambani. Today, he is in Tihar Jail, caught up in the 2G scam.

Cosy personal relationships mean that tough professional questions rarely get asked. Damodaran, who cracked the whip on many listed companies during his Sebi stint, warns against falling into the “presentation trap and becoming a prisoner of colorful illustrations” on Powerpoint. “A board that doesn’t add value is like cardboard,” quips Ganguly.

Corporate coach Ram Charan has some good advice in his book “Boards That Deliver.” His list of top questions a board should ask includes, “Do you have the right CEO” ? As he puts it, boards fail not just when they are unable to root out fraud but also when they “allow faltering performance” .

Then, there is the practice of having “trophy” directors like film actors and celebrities who may add a glamour quotient but may not know much about the business. However, even well-informed directors fret that there is only so much information they can get out of a promoter. “How can an independent director determine what a businessman does to get a licence at some stage?” asks Parekh.

Says another director, who did not wish to be named, “Directors will only know matters that come to the board. A promoter who gives bribes will not share this with the board and it’s very hard for any director to ascertain this information .”

Not everyone agrees. Rajesh Shah, a past president of CII who is not only a promoter of Mukand Steel but also sits on boards such as Ranbaxy’s , claims the onus is on the director. “All decisions can’t be only the management’s . When you can see that the telecom sector is shrouded in controversy, the board should advise the management against venturing into it.”

So, is there a solution? India could consider a National Institute for Company Directors, just as in the US and the UK, to help think through some of the more complex issues. Ganguly says such a body “may not be a bad idea.”

At the end of the day, though, there is always a “moral compass” that directors should observe, says Ganguly “You can always sense which way the wind is blowing,” he asserts.

Increasingly, it no longer makes sense to ignore it.

(Economic Times)

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Posted by on Aug 1 2011. Filed under Corporate Governance. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

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