INTRODUCTION
Since the emergence of big corporate scandals in India, there has been much debate on Corporate Governance and also the role of the company director including the independent director. India being a preferred investment destination will have to strengthen the governance norms, so to achieve the highest investment ever.[1]Therefore we have to strengthen the role of an independent director as a watchdog to maintain the standard governance norms.
The directors in an enterprise are prominent as they provide strategic guidance, leadership, management, and exercise control.[2] An eminent and capable individual joins the board and controls the management but they are not allowed to enjoy the powers which are specifically reserved for the minority shareholders.[3] An independent director (non-executive director) constitutes the category of directors who help the company in improving corporate credibility and governance standards. They play an important role in bringing transparency, accountability, and credibility to 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 were expected to work as a watchdog), but nothing substantial could be done. After the Satyam scam, and even before Satyam in the case of Enron, WorldCom a question mark has been raised on the role of an independent director. The IDs have 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. The article tries to critically analyze the role of IDs in the contemporary corporate regime and tries to analyze plausible solutions while drawing comparisons to other countries.
1.1 NEED FOR IDs IN INDIA:
The concept of IDs emerged as a solution to the governance problem with the idea of corporate governance that emerged to solve the problems in the regulations of the enterprises. It was felt that the IDs would work independently and is as an independent member, IDs would be able to represent the interest of the shareholders including the minority shareholders. It is pertinent that the overall working of any enterprise depends on how the interest of the shareholders including the minority shareholders has been protected. The provisions of IDs[4] have been introduced to represent the minority interest. For instance, in the Tata case, this has been observed that the IDs are working in the promoter’s line. If they wouldn’t have been ready to work in the promoters’ line they would have been sacked because of promoters’ control in the annual general meeting e.g. Nusli Wadia. In the incident of Nusli Wadia, there was a check on the independence of the IDs working as this case shows the promoter powers of IDs in India. But on the other hand, after big corporate scandals in the 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. For example, 75 percent of large listed Indian companies are family-owned. In these companies, most of the substantial decisions[5] are taken by the family members and on the other hand, the other board members and the stakeholders are mere spectators. Thereby, there must be independent members on the board to represent the general welfare of the firm.
Thirdly, as per the rules, the management cannot act unfairly 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 control over 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 and facilitate the interests of minority shareholders.
1.2 CRITICAL ANALYSIS OF THE ROLE OF ID
The Independent Director has a substantial role to play, as only the IDs are independent entities in the board of directors (other directors are appointed by the majority shareholders or promoters) and may have the courage to speak without fear of promoter. In other words, IDs are regarded as not under the influence of the promoters/ majority shareholders. After comparing the role of ID in principle, and the actual working of the ID, it 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 top companies are on the defaulters’ list, as they have not appointed an ID to date. Even after three decades, there is no fixed 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, they have not spelled out any procedure regarding the appointment. The majority shareholders or promoters are still appointing the IDs and independence of ID is at stake. The ID appointed by the promoter/ majority shareholders cannot function impartially and independently. To 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 independently and efficiently. They only participate in the board meeting and do nothing beyond to check the actual health and affairs of the company.
Further, the ID is also barred from interfering in the 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. However, cases have been registered against the IDs too and 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 incident in the Bhopal gas tragedy case decision, the court held Keshub Mahindra, ex-administrator, Union Carbide India, liable for two years of detainment. This made a dread psychosis in the brains of IDs. Following these occasions, almost 340 IDs have left their post. Numerous individuals are currently not appearing to acknowledge the post of ID and stain their notoriety.
1.3 CONCLUSION AND SUGGESTIONS
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.[6] This may further extend the role of IDs 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 from 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.[7]
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.[8] 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 the Satyam case and Bhopal case, it was felt that fear in the minds of the IDs should be removed by introducing the ‘fault liability’ theory. The announcement of the data bank of IDs should be further extended by giving access to the general public and must have a credit/ rating system, so the defaulter must not be part of any board of the company. Still, the announcement of a data bank under the supervision of IICA is welcoming. The government plan to review the functioning of IDs is also welcoming and must be introduced without delay to make the IDs more accountable.
[1] Available at https://www.mondaq.com/india/directors-and-officers/510724/roles-and-responsibilities-of-a-director-under-companies-act-2013-pitfalls-and-safeguards(accessed on 28.04.2020).
[2] It controls the company and its management by laying down the code of conduct, overseeing the process and disclosure and communications, ensuring that there is appropriate system for financial control.
[3]Available at https://www.lawteacher.net/free-law-essays/business-law/role-of-the-independent-directors.php
[4]In a broad sense, an ID is a non-executive director who does not have any kind of relationship with the company that may affect the independence of his/her judgment.
[5] Significant shareholding is called when 30 per cent upwards share is held by a single family or individual.
[6] Vikramditya S. Khanna and Shaun j. Mathew, “The Role of Independent Directors in Controlled Firms in India: Preliminary Interview Evidence”, Nat‘l. l. Sch. of India Rev. 22, pg.35 (2010) at 45.
[7] Independent Directors – A HandBook, available at https://www.icsi.edu/media/webmodules/companiesact2013/INDEPENDENT%20DIRECTOR.pdf.
[8] The criteria prescribed for the appointment of the ID under rule 49 of the listing agreement is not sufficient. It is wage in nature and gives far discretion to the promoters or the majority shareholders.
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