The Hindu Business Line : Making company directors effective

It will be unwise for the Government, as also the regulators, in India to ignore the series of instances in the last decade of collapse of prominent longstanding firms, both in the US, and also, though not in such large numbers, in Italy, Japan and the UK. Human nature is the same everywhere, and Indian ethos has no impenetrable shield against greed.

India too has been having its own version of subprime lending for years: Only, here, banks, especially the nationalised ones, and non-banking financial companies (NBFCs) let the VIPs in politics and public life dip into their resources with reckless abandon. Strictest possible vigilance on the working of the companies and the decisions they make is required all the more when bourses are soaring and the temptation to make a fast buck is widespread.

Whether corporate governance codes and legal sanctions fully safeguard the interests of the investors and stakeholders is debatable. Everything finally hinges on the watchfulness and effectiveness of the directors of company boards. Would non-performing assets have sky-rocketed and NBFCs have been able to indulge in wholesale squandering and plundering of depositors’ hard-earned money had the boards of directors been conscientious in performing their duties?

Or, take the other phenomenon of mergers and acquisitions that is gathering force and hailed as a testimony to the mettle and might of India Inc. It may well be, and may eventually turn out to be a triumph, but it does not preclude the need on the part of the directors to go into the choice, the timing and the valuation. Indeed, in the absence of any fool-cum-knave-proof matrix for arriving at the precise valuation, the directors may well be constrained to endorse the proposal trusting to the judgment of the chief executive and his aides.

Clause 49

As for the investors and stakeholders, they have no means of assuring themselves of the degree of transparency and diligence going into the appraisal. The ways open to them to ascertain the background and the basis for such momentous decisions are writing letters seeking information or asking questions at the annual general meeting, and in both cases the information furnished is usually found to be skimpy or obfuscatory.

That companies are generally averse to showing their hand is obvious from the storm of protest raised by them sometime ago when they were asked by the SEBI to add clause 49 to the Listing Agreement requiring appointment of a stipulated proportion of independent directors, enlarging the scope of audit committees, laying down the obligations of the board of directors and management and ensuring compliance through monitoring procedures and information systems.

So far as is known, even the criteria for independent directors are lacking. This is a major loophole and needs to be plugged. The aim should be to make sure that independent directors and their family members (family being defined as spouse, parents, children, grandchildren, siblings, nieces, nephews, parents-in-law, sons-in-law, daughters-in-law, brothers-in-law and sisters-in-law and anyone, other than domestic employees, who shares the director’s home), are not current or former employees of the company.

They should not also function as, or be associated with, the company’s advisors, consultants, advertisers, or auditors, or be in receipt of any payments other than sitting fees, or come under any sort of obligation whatever. They should not be shareholders of the company, or connected with any outfit which receives any donation or other benefits from the company. They should also refrain from serving on interlocking boards or compensation committees.

In short, they should not have any relationship with senior management or with another director that may affect their independent judgment.

B. S. RAGHAVAN

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