Legal safeguards for independent directors vital to attract top talent

CII has suggested that proceedings against IDs may be initiated only once there is prima facie evidence of their possible involvement in the matter, rather than as a matter of course

All listed companies should provide legal and procedural safeguards to independent directors against criminal liability to attract more talent to the boards, the Confederation of Indian Industry (CII) has recommended in a set of guidelines released on Monday.

In the guidelines on the appointment of independent directors and the process of board evaluation, the industry association has suggested indemnity or insurance formalised through appropriate written agreements for their protection.

CII has suggested that proceedings against independent directors may be initiated only once there is prima facie evidence of their possible involvement in the matter, rather than as a matter of course.

“India has gone too far in attaching liabilities to independent directors. The zealous response from investigating agencies, including arrests of independent directors even before investigations are completed and their wrongdoing proven in courts, leads to a shortage of quality independent directors (especially for listed entities), as individuals are concerned about their legal liabilities and reputation,” said CII in the report.

Under the regulations specified by the Securities and Exchange Board of India, the top 1,000 listed companies by market capitalisation are required to provide liability insurance to directors and officers.

CII has recommended all listed companies extend this protection.

Among other guidelines, CII has called for a review of the responsibilities of independent directors, preset criteria for appointments, tenure, and compensation, along with a wider diversity on the board with more women directors and people with varied skill sets.

CII said that directors may be selected based on the requirements of the organisation — which may be different for a startup or a matured company — instead of criteria like the number of years of experience.

Additionally, a review of the tenure of independent directors has also been recommended for continuity in policies and practices.

“Based on performance and fitment per the evolving aspects of business, there may be merit for independent directors to be appointed for two terms of five years each (as permissible under the law). This will help independent directors understand the sector and company well and enable focus on long-term performance,” said CII.

The industry body has suggested adding crisis and risk management, internal controls, and standards for conduct and sustainability to the responsibilities in addition to the traditional roles in strategy, finance, and audit.

The industry confederation has also suggested additional measures for the performance evaluation of board directors like setting timelines and bringing in a rating mechanism. It further suggests disclosures on action taken based on the board evaluation and progress made on past actionable items.