The Satyam fiasco has brought to the fore the role and responsibility of independent directors on a company’s board. The Securities and Exchange Board of India introduced the concept of “independent directors” in clause 49 of the listing agreement with a lot of expectations from them and active participation in the board proceedings. Sebi’s initiative is based upon the recommendation of Ramesh Chandra Committee which drew heavily on the Sarbines-Oxley Act of USA and which came out in the wake of large scale financial failures in USA.
The message is that the independent directors are required to safeguard the financial interest of the organisation. For this purpose, clause 49 seeks to provide outside expertise by eminent persons for imparting professionalism to boards. The constitution of the Audit Committee is the forum to achieve the above objective, apart from the proceedings at the board level.
The Satyam fiasco has come as a test case to re-examine the effectiveness of independent directors on boards. Though a lot of emphasis is placed on the “independence” of independent directors, their appointments are left to the boards and the promoters holding controlling stake in a company will have the major role in the selection and handpicking of independent directors.
To this extent, the independence of independent directors is compromised. This indicates that such directors cannot be as independent as they are expected to be, going by the way they are appointed. This position deserves to be corrected by empowering Sebi\the Indian government to nominate independent directors (at least one or two of them) on the boards of listed companies, out of a panel of professional experts maintained by it and to rotate such directors periodically or by any other method whereby the independence of independent directors is secured.
On the face of it, this suggestion may appear to be worse than the disease as the independent directors will be nominated by taking away the authority of shareholders. There is no other alternative. At least this will break the nexus between the independent directors and the promoters who sponsor them.
As regards the role and responsibility of independent directors is concerned, it has to be conceded that they are an integral part of the board and they have to function in that spirit. The authorities and powers which an incorporated body enjoy are derived from the constitutional documents like memorandum & articles and these powers are exercisable by the board as a collective body.
No individual director can exercise any power and authority independent of the board except those which are delegated to any committee or individual director for administrative or statutory purposes. Even the audit committee required to be constituted under clause 49 of the listed agreement or under section 292A of the Companies Act is a creation of the board and it has to function within the terms of reference, subject to statutory provision in this regard.
It follows from the above that independent directors can definitely contribute qualitatively to the richness of board proceedings but they may not be able to finally influence the decision of the board, constituting as they do one-third / one-half of the board. Board decisions are normally taken on the basis of consensus, failing which on the majority of votes.
Being an integral part of the board, they take part in the decision making process and consequently they are also liable for consequences of their action or inaction. It is difficult to think of any immunity for them. Rightly, the government of India decided to issue show cause notices to all past directors in the Satyam case including independent directors and get their views in the matter before launching prosecution against the offenders.
The author is director (training) FoxMandal Little, Solicitors & Advocates, Bangalore. The views expressed herein are his own.
