Is accountability such a bad word? Wary of new accountability norms setting in, independent directors are quitting in droves
Published: Jun 16, 2018
By M P Shorawala, Advocate, Supreme Court of India
AS per the tracker of the primary market - Prime Database, more than 982 independent directors have resigned since January 2015 and this number is only expected to rise. Data suggests that that during the third quarter of 2017 itself, more than 150 independent directors resigned.
The issue of exodus of independent directors from company boards is taking the shape of a major concern - for the companies, the stock market, investors as well as the government. As the new changes ushered in through the new Companies Act came into force, it strangely has led to an unexpected negative fallout.
With the changes in Companies Act, Independent Directors are now made more accountable. Independent directorship - a role which was once considered easy, lucrative, and devoid of any accountability (and hence with no risks) does not seem to be the same anymore – to many. Now when accountability is getting fixed under the new Company Law and Uday Kotak Committee recommendations, these independent directors are running away from the same. Is accountability such a bad word for them?
Let's visit some of the major reasons that is making several independent directors so jittery and leading to their resignations.
One big reason is that independent directors are quite wary about the increasing prospect of being made liable for any wrongdoing by the companies they are associated with. Recent court rulings and stronger regulatory oversight by the market, banking and insurance watchdogs, have stepped up the scrutiny on boards and has increased the liability of the directors.
Also, with several insolvency related cases to be decided by bank boards, several independent directors are having second thoughts about continuing.In the past two years, several independent directors have resigned from debt-ridden companies or those companies not able to make loan repayments on time.
In January 2018, SEBI accepted most of the recommendations as suggested by the Uday Kotak committee on corporate governance which is expected to improve the standards of corporate governance at listed companies.
The SEBI board decided to accept several recommendations of the Committee without any modifications, including the following major ones like: Reduction in the maximum number of listed entity directorships from 10 to 8 by April 01, 2019 and to 7 by April 1, 2020; expanding the eligibility criteria for independent directors; Enhanced role of the Audit Committee, Nomination and Remuneration Committee and Risk Management Committee; Disclosure of utilization of funds from QIP/preferential issue; Disclosures of auditor credentials, audit fee, reasons for resignation of auditors; Mandatory disclosure of consolidated quarterly results with effect from FY 2019-20.
The SEBI board also decided to accept several recommendations with modifications, major of which included the following:Minimum 6 directors in the top 1000 listed entities by market capitalization by April 1, 2019 and in the top 2000 listed entities by April 1, 2020; At least one woman independent director in the top 500 listed entities by market capitalization by April 1, 2019 and in the top 1000 listed entities by April 1, 2020; Separation of CEO/MD and Chairperson (to be initially made applicable to the top 500 listed entities by market capitalization w.e.f. April 1, 2020; Quorum for Board meetings (1/3 rd of the size of the Board or 3 members,whichever is higher) in the top 1000 listed entities by market capitalization by April 1, 2019 and in the top 2000 listed entities by April 1, 2020; Top 100 entities to hold AGMs within 5 months after the end of FY 2018-19 i.e. by August 31, 2019.
Some recent happenings too have made the writing on the wall much very clear of the times to come to independent directors.
Recently, in the case of Fortis, in the midst of different buyout offers from Burmans, IHH, etc, role and responsibilities of independent directors were questioned whether they were acting impartially, and were forced to resign.
Surprisingly, in the case of United Breweries, long after the promoter has left the country, market watchers have continuously questioned whether Independent Directors were indeed acting impartially or only trying to protect their own interests.
Notwithstanding the many steps by the SEBI and the new Companies Law, they all seem to be very good prospectively going forward but we must also not overlook the fact in several cases where the independent directors have not played their roles they should have. Responsibilities must be fixed for independent directors wherein there has been clear cut fraud in cases in like UB, Nirav Modi, Vakrangee, and several others. This should not be forgotten or swept under the carpet with new norms coming into force. Guilty, wherever proved, must be made to pay for their crime.
SEBI chief Ajay Tyagi recently was quite sharply critical of the existing corporate governance practices in several firms and observed that "independent directors are not independent" He said that "many times they conveniently resign, independent directors just resign most commonly saying health reasons and not actual reasons."
Fixing responsibilities in past cases like mentioned above will be a strong message that Independent directors should take their roles much more seriously.They should not be subservient to promoters and assert their independent assessment. Independent directorship should not become a status symbol or some passive role that gives easy money but as a role whose job is to protect the interests of the shareholders, especially the common ones.
As for the ones who have resigned are on their way out – my sympathies with them. But let only such new ones come in who have the wherewithal to stand up to pressures and stand up for those principles for which them have been appointed. Let accountability be the new norm now!
(The author is the ex-director on the board of the Central Bank of India, Bombay. He is also an ex-director on the board of the Container Corporation of India New Delhi. The author's views expressed in this article are strictly personal.)
