Author: Brahm Sareen (Guru Gobind Singh Indraprastha University)
Since the emergency of big corporate scandals in India, there has been much debate on Corporate Governance and also, the role of company director including the independent director. India being a preferred investment destination, we have to strengthen the governance norms, so to achieve the highest investment ever. It is therefore, we have to strengthen the role of independent director appointed for the sole purpose of acting as a watchdog so as to maintain the standard governance norms.
The directors in an enterprise are prominent as it provides strategic guidance, leadership, management and exercises control. Eminent and capable individual joins the board and control the management but they are not allowed to enjoy the powers which are specifically reserved for the minority shareholders. Independent director (non-executive director) constitutes the category of directors who helps the company in improving corporate credibility and governance standards. They play an important role in bringing transparency, accountability and credibility in the firms. An effective and balanced board may only be ensured with the appointment of IDs.
It was expected that the governance norms would be a cure in curbing the corporate fraud (the IDs was expected to work as a watchdog), but nothing substantial could be done. After Satyam scam, and even before Satyam in the case of Enron, WorldCom case a question mark has been put on the role on independent director. The IDs has failed to perform the basic duty of keeping a check on the management and promoters against unjust enrichment. After comparisons, we find that there is a large gap between the actual working of IDs and the role of IDs in principle. Therefore in the proposed research the authors would like to critically analyse the role of IDs in the contemporary corporate regime and would try to make suggestions so as to achieve the standard corporate governance norms in the line of US, UK and so on.
1.1 NEED FOR ID’S IN INDIA:
Firstly, the concept of IDs emerged with the idea of corporate governance, as the idea of corporate governance emerged to solve the problems in the regulations of the enterprises; the concept of IDs emerged as prominent solutions of the governance problems. It was felt that the IDs would work independently, and being independent member IDs would be able to represent the interest of the shareholders including the minority shareholders. It is pertinent that overall working of any enterprise depends on how the interest of the shareholders including the minority shareholders has been protected. The provisions of IDs have been introduced to represents the minority interest but e.g. in Tata case this has been observed that the IDs are working in promoter’s line. If they are not ready to work in the promoters’ line they are sacked because of promoters control in the annual general meeting e.g. Nusli Wadia. Incidence of Nusli Wadia was a check on the independence of the IDs working as this case shown the IDs promoters’ powers in India. But on the other hand after big corporate scandals in US, it was felt that to save the corporate sector from these financial scandals proper implementation of the corporate governance norms is mandatory.
Secondly, the need was further extended by the fact that Indian management is different than the US corporate structure, e.g. 75 percent of large listed Indian companies are family-owned. In the above companies most of the substantial decisions are taken by the family members and other board members or the stakeholders is mere spectator. Thereby, there must be independent members in the board to represent the general welfare of the firm.
Thirdly, as per the rules management cannot act unfair to any of the shareholders. Still the majority shareholder continued acting for personal gains, even at the cost of the company’s overall interest. The promoters having controlling shareholding are responsible to appoint the directors, board members and thereby they usually act in the larger interest of the majority shareholder. It was felt that the IDs being independent of any financial interest in the company would be able to represent the minority shareholders’ interest too.
1.2CRITICAL ANALYSIS OF THE ROLE OF ID
The Independent Director has a substantial role to play, as only the ID are the independent in the board of director (other directors are appointed by the majority shareholders or promoters) and may have courage to speak without fear of promoter. In other words, IDs are regarded not under the influence of the promoters/ majority shareholders. After comparing the role of ID in principle, and the actual working of the ID, this has been observed that independence of ID is jeopardized.
The concept of ID has failed, as the ID is taking decisions for the majority stakeholders and the minority stakeholders are still suffering. The independence of the IDs is facing a question mark. The top companies are in defaulters list, as they have not appointed the ID till date. Even after three decades, there is no fix selection procedure for the appointment of the ID. Though, the previous committees (appointed for the reforms in corporate governance) have fixed the number of the IDs but they have not spelt out any procedure in regard to the appointment. The majority shareholders or promoters are still appointing the IDs and independence of ID is on stake. The ID appointed by the promoter/ majority shareholders cannot function impartially and independently. Till date only the part-time IDs are allowed to be appointed and no provision has been laid down for the appointment of the full-time IDs. The part-time IDs have not been able to function in an independent and efficient manner. They only participate in the board meeting and do nothing beyond to check the actual health and affairs of the company.
Further, the ID also barred from interfering into day-to-day activities of the company. Even the qualification for the appointment of ID has not been prescribed and thereby the promoters or the majority stakeholders are appointing the ID, who works for them. In the Satyam case, cases have been registered against the IDs too and thereby this has created fear in the mind of the IDs. The Satyam fiasco has raised questions over the responsibilities and liabilities of the IDs. In the background of the above incident in the Bhopal gas tragedy case decision the court held Keshub Mahindra, ex-administrator, Union Carbide India, liable and condemned him to two years of detainment. This made a dread psychosis in the brain of ID. Following these occasions, almost 340 IDs have left their post. Numerous individuals are currently not appearance to acknowledge the post of ID and stain their notoriety.
1.3 CONCLUSION AND SUGGESTIONS
Though it was expected that the Role of an Independent Director under the New Act will be that of a ‘Super Watchdog’ who has to ensure that those in the day to day management (including all Directors on the Board) are functioning in the best interest of the stakeholders, minority shareholders, workers, customers and public at large. This may further be extended the role of ID as strategic advisors to the management. We can conclude by saying that in the present scenario, though the provisions for the IDs have been made for protecting the general interest of the shareholder and to protect the company for unfair corporate practices, they end up doing well to the Promoters. The IDs are not able to stop the promoters and majority shareholder in adopting the unfair corporate practices and even they are not in a position to stop fraud, but with a high commitment and due-diligence, they may be well placed to identify signals that indicate that everything is not as it should be.
There is an urgent need to ensure the independence of the ID, by fixing the appointment procedure and also by prescribing the basic eligibility criteria (qualification) for the appointment. Fine should be imposed against the defaulters who have not appointed the ID within the stipulated timeframe. Provision for the appointment of full-time ID should be introduced. After Satyam case and Bhopal case, it was felt that fear in the mind of ID should be removed by introducing ‘fault liability’ theory. The announcement of data bank of IDs should be further extended by giving access to the general public and must have credit/ rating system, so the defaulter must not be part of any board of company. Still the announcement of data bank under the supervision of IICA is welcoming. The government plan to carry out a review of the functioning of IDs is also welcoming and must be introduced without delay so as to make the ID more accountable.