Business Standard

Independent directors are answerable to stakeholders

Companies Bill, 2012, provides immunity to only those independent directors who act diligently

Asish K Bhattacharyya 

Did independent directors on the board, during 2006 to 2008, fail in their oversight function? Truly speaking, adequate information is not available in the public domain to evaluate the performance of independent directors on the board, during that period. Making independent directors responsible for the wrong doing of the company is a knee jerk reaction.

Whenever a fraud, unethical behaviour of employees and management, regulatory violations, or any such incident that hurts the interest of the company and its comes to light, we quickly come to the conclusion that independent directors had failed in their duties. In the case of Ranbaxy, the reactions are no different.

Such a reaction is not surprising. place high expectations on independent directors, particularly when they are highly respected and successful professionals and enjoying high stature in the society. believe that nothing wrong can happen before their watchful eyes. We expect that one who talks about responsible business from different platforms walks the talk and dissociates himself/herself from a company that demonstrates its disregard for the principles of responsible business. These expectations lead to our knee-jerk reaction of holding independent directors responsible for wrong doings of the company.

There is a gap between what independent directors can do and what we expect them to do. The best of risk management, internal control, internal audit and performance management systems provide only reasonable assurance that the company will achieve its objectives. This is so because every system has inherent weaknesses. Independent directors' responsibility is limited to ensuring that appropriate systems have been installed and they are operating efficiently and effectively. The best available system might not be the most appropriate system for the company at a particular point in time. Choice is made on cost-benefit analysis. Availability of resources, including capabilities, is also considered in making the choice. At a particular point of time, a company might be exposed to higher than the desirable level of risks due to lack of resources and capabilities. In that situation, the responsibility of independent directors is to see that the executive management takes the right corrective actions, for example, special initiatives to build capabilities. Independent directors cannot be held responsible if some risk event, which was identified and assessed but could not be mitigated due to inadequacy of resources, occurs causing loss to the company.

Independent directors are not liable for the poor performance of the company due to poor strategy or inefficient strategy implementation, provided they have applied their mind and deliberated important issues diligently in board meetings. Although the board approves strategy and review performance, it is the executive management that is primarily responsible for formulating and implementing strategies. Independent directors bring independent views in deliberating strategies and performance. They seldom reject strategies proposed by the executive management. Usually, they oppose a proposal only if it clearly aims at enriching a particular group or it is not aligned to the purpose of the company or it does not address reasonable expectations and concerns of one or more stakeholder groups. Re-appointment of M R Narayana Murthy as executive chairman of Infosys vindicates this view. The illustrious Board of Infosys could not check the sliding of the company's performance. Independent directors should not be held responsible for the same. Independent directors cannot and should not own up the responsibility for formulating and implementing strategies. If, they get involved in the same, they might lose their independence.

Companies Bill, 2012, incorporates the Code For Independent Directors (Schedule IV). We may expect that the (MCA) will enforce accountability of independent directors more rigorously after the enactment of the new MCA can use its right to examine Board Minutes and other records to collect information. For example, audit of Ranbaxy's board minutes and other records for the period 2006 to 2008 might provide answers to such questions as whether the independent directors had asked for a report on the deliberations in the Science Committee, what was the tenor of deliberations in the board and what direction the board had issued to the executive management. Audit of the minutes would also throw light on how much importance was given to notices issued by the US Regulator and whether the Board approved replies to those notices. Often minutes do not record detail deliberations in the meeting. As a first step, MCA should examine minutes and other records to identify deficiencies in the board processes and records. It should give a chance to companies to correct those deficiencies.

Companies Bill, 2012, provides immunity to only those independent directors who act diligently. Independent directors can protect themselves from liabilities only if they ensure that important issues are included in the agenda and the minutes record deliberations and decisions appropriately. They should identify important issues by scanning media reports and other reports on the company and the industry and by reviewing minutes of earlier meetings. If an independent director continues to feel uncomfortable over the board process for a long period (say, one year), he/she should resign from the board.

Let us not lend our names or join Boards only for stature and perks associated with the position of independent director. Let us not cheat stakeholders.

Affiliations: Professor and Head, School of Corporate Governance and Public Policy, Indian Institute of Corporate Affairs; Advisor (Advanced Studies), Institute of Cost Accountants of India; Chairman, Riverside Management Academy Private Limited

First Published: Sun, June 23 2013. 21:07 IST