Corporate Governance Standards Cannot be Raised Only by Independent Directors


By S D Israni

The Companies Bill, 2011, portends to be a game changer. On the face of it, the new company law should have fewer provisions with only 470 sections as compared to present Companies Act, 1956, which comprises nearly 700 sections. However, in reality, the new company law will have more provisions if one were to take into account the number of rules that are on anvil. There are at least 473 items listed in the Bill on which rules will have to be formulated by the ministry of corporate affairs (MCA). Therefore, it will not be surprising if, effectively, the new law ends up having 1,000 or even more provisions.

The thrust of the new law, apart from providing two new classes of companies, is towards better corporate governance through greater accountability and transparency in the operations of companies. While there are provisions that enhance responsibilities of professionals like chartered accountants and company secretaries, the objective of better management is sought to be achieved through the mechanism of independent directors.

Presently, the term ‘independent director’ does not even figure in the Act. Independent directors made their appearance, thanks to clause 49 of the listing agreement that was enforced by Sebi as part of the measures to be enforced by a listed company to improve its governance, keeping in view practices prevailing in the developed markets of the world.

The Bill mandates every listed public company to have at least one-third of the total number of directors as independent directors. For unlisted public companies, the Centre will prescribe the minimum number of independent directors.

For a person to qualify as an independent director, he will have to satisfy several criteria specified in the Bill. He should be a person with integrity and also have the relevant expertise and experience. He should not be a promoter nor related to the promoter; he should have no connection with the promoter, the company, associate company, subsidiary or holding company.

Any pecuniary dealings by a person with any company in the group or its promoters, their relatives will make him ineligible for being appointed as an independent director. Besides, there are many other circumstances under which a person is not fit to be an independent director of a listed company. These include, for instance, being a CEO of an NGO that holds 2% or more shares in the company or receives 25% or more donations from the company. That is not all. A person aspiring to be an independent director will have to possess such other qualifications as may be prescribed by the Centre from time to time.

There is also a separate schedule to the Bill that lays down the code to be followed by an independent director. The code includes guidelines of professional conduct, role, functions and duties, and so on.

These include safeguarding interests of all stakeholders, particularly minority shareholders; striking a balance between conflicting interest of the stakeholders; determining appropriate levels of remuneration of executive directors and key managerial personnel and so on.

In addition, independent directors are also expected to scrutinise the performance of management in meeting agreed goals and objectives and also monitor reporting of their performance. In other words, the onus is on independent directors to ensure that the company is on the right track to achieve the desired goals.

An important provision in the code is that of empowering and enjoining upon independent directors of a company to hold at least one meeting in a year, without the presence of non-independent directors and members of management. They have to review the performance of non-independent directors as also of the chairperson of the company.

Independent directors also need to assess the quality, quantity and timeliness of flow of information between the company management and the board. An independent director will be permitted a maximum of two terms of five years each. He can be appointed once again by the company after a cooling period of three years. However, during that period, an independent director should not have any relationship with the company. An independent director will be entitled to remuneration only by way of sitting fees and a share in the commission of profits, if any, that may be approved by the members of the company by a special resolution.

What is evident is that the government is at its wit’s end, not knowing how to make the corporate sector more accountable and transparent in its dealings. At the same time, it is keen on protecting the interest of minority investors. In such a scenario, the government seems to believe that merely by mandating the independent directors to perform certain duties, all the problems will be solved.

Notwithstanding the data bank, where will companies find persons who possess multiple conditions stipulated in the Bill, and are competent and desirous of taking all risks with minimal reward and be accountable for all the deeds of the company. While no doubt the Bill has a provision restricting the liability of independent directors, that by itself may not be enough.

In conclusion, it is not going to be an easy task for companies to find persons who have no connection with the promoters and their companies, persons who are qualified in terms of the requirements stipulated in the Bill and are willing to act as independent directors. It will be like looking for lotuses in filthy ponds.

Author: Dr. S. D. Israni (61) is an advocate in the high court and Partner of S.D.Israni Law Chambers, Advocates & Solicitors (UK). He is qualified in the field of Law, Company Secretaryship and Management. Has over 37 years’ experience as a practitioner in the field of Corporate Laws, Securities Laws and Business Advisory services. Started in the Chambers of late Shri D.M.Harish, renowned tax advocate. He has held many coveted positions in various Committees formed by the Central Government and Professional and Statutory Institutions. He is also Author of various books meant for his profession. Oratory is his obsession. He is also director in various other companies.

(Article first published in Economic Times, 7 January 2012)

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