Independent directors.

The moment we say talk about this non-executive Board designation, what comes to mind is almost always, a man, very well-to-do, with a reasonably good reputation. We look upon this designation as a seat which is filled by respected people from the society, who lend some respectability to the company with their name. The independent director in turn holds this post, most of the times in various companies, mainly like a prestige card. He is an independent director because this plum post adds more value to his name, another status to flaunt and more money to earn.  Most of us never even knew that independent directors acted like an external inspector, who ensured that there was no compromise on corporate governance.

Really? Is that what an independent director is supposed to do? In listed companies, at least one-third of the Board should comprise of Independent Directors. They are the next-in-line to the auditors when it comes to scrutinizing the books and ensuring there is no hanky-panky business.

They have a role in:

• Countering pressure from owners/founders
• Succession planning
• Providing unbiased judgement on strategy, performance, risk management, funding, key appointments and corporate governance.
• Scrutinizing, monitoring and reporting management’s performance regarding goals and objectives agreed in the board meetings
• Most important role – safeguard interests of all stakeholders, mainly the minority shareholders
• Pay close attention to financial controls
• Ensure reasonable remuneration is provided for executive directors, key managerial personnel and senior management

Whaaa? Isn’t that how we tend to react on realizing the role of the independent director?

The role of these directors first came into the limelight after the Satyam scandal and 10 years on, we wonder how far they have come. Yes, they have more responsibility and their role today is taken seriously but they do not yet do the job of maintaining their vigil and remain bias-free. The recent scam at IL&FS brings their role once more into perspective.

A recent report shows that more than 1000 independent directors have quit their posts in FY19 as the onus of their role finally dawned on them. And in the first two months of FY20, some 400 directors have already quit.

Under the new law, directors are liable to face class action suit under the Companies Act, criminal misappropriation under Section 403 of the Indian Penal Code (IPC), and criminal breach of trust under Section 405 of the IPC. Also if an independent director is on the Board of a willful defaulter, if the independent director has not showed dissent for failing to act, he himself could get tagged in his personal capacity as a director.

Looks like nothing has deterred many from shirking their responsibilities and that explains why the Govt is mooting the idea of put aspiring independent directors through an exam/test to ‘qualify’. The online assessment will cover basics of Indian company law, ethics and capital market rules and will have to be taken by aspiring directors; experienced directors will be exempt. Why the exams? To prove that independent directors do have fiduciary duties and are well versed with corporate literacy.

This is an admirable move – putting the supposed watchdogs through a test. It brings in an air of professionalism but the question is- will they be willing to undergo a test? With many already giving up this plum post as responsibilities and accountabilities have increased, the thought of a test could put off many more. But then, if a person is capable and well versed, professional and looks at this designation beyond being a ‘status symbol’ then he/she will have no compunction is taking the test.

It is very good that independent directors are being made more accountable as keepers of corporate governance but they are not the sole watchdogs.  The prime responsibility is that of the auditors and before that, the founders and management. If they fail, won’t the same value percolate all the way down?

You can have the best trained watchdog at the gate but if the owners themselves are robbers, nothing can save the company.