The Hindu Business Line : Non-executive directors — Board them from needless litigations

BOTH the Government and the regulatory authorities are agreed that the performance of company boards needs to improve to ensure better corporate management and prevent malpractices. The healthy performance of a company depends on the board providing the thrust and guidance.

Thus, the Government is encouraging companies to induct on their boards professional directors with requisite background and track record, but it must be appreciated that unless the right persons are attracted, the exercise will be in futility. There is now some reluctance on the part of professionals to accept directorship as examples abound of harassment.

The rules and regulations for better corporate management are welcome but to draft right persons as directors, a change in the milieu is needed. There have been instances of action being taken against directors whether or not they are connected with the day-to-day running of the company.

Justice demands that non-executive directors not connected with the day-to-day management of the company are not held responsible for all actions of the company. However, where directors are aware of any information or any adverse development but prefer to keep silent, they shall be accountable.

Non-executive/professional directors are not provided every information of the company. Such directors only participate in board meetings and discuss the questions brought before them.

According to the Criminal Procedure Code, the complainant has to adduce evidence at the time of the filing his charge and thereafter the court orders a police enquiry and only after receipt of this report are summons issued and proceedings are initiated. This requirement is missing in many instances. Summons are issued as a matter of routine in many cases where prosecution is launched against a company and all its directors, including the non-executive/professional directors.

No complaint against non-executive director shall be taken cognisance of unless prima facie supported by documentary evidence of his involvement. Unbelievably, criminal actions have been initiated against directors for dishonour of cheques issued when they did not hold the office, indeed were in no way connected with the companies.

Cases dragged on for years despite submission before Courts of documents under the signature of the office of Registrar of Companies that the persons concerned were not directors when the cheques were issued. In such cases, it will be appropriate that the proceedings are dropped in the initial hearings by courts making reference to the Registrar of Companies.

The involvement of a large number of persons in a case entails prolonged litigation as each and every party has to go through the trial process which means not only harassment of these persons but also wastage of public money. In many cases summons issued to directors are sent to the address of the company.

The promoter- directors ignore the summons for the directors no longer on their boards. When summons are returned, courts issue non-billable warrants on directors who may have long quit a company's board.

The practice of some government departments to issue notices to all directors for any lapse or default by the company without verifying id they all are indeed involved in the day-to-day management must be discouraged. For instance, a non-executive director received notice for non-fulfilment of export obligations by an associate firm of the company in which he was a director nominated by a government body.

He had never been a director of the associate company. This indicates how a director for no fault for his can be harassed. Government officials must not also use their powers arbitrarily.

Only if it is ensured that non-executive directors are not harassed by a pliant system, will professionals make bold to take up positions on company boards. The authorities must work on this aspect without loss of time else its good intentions will remain just that — intentions.

(The author is a former Deputy Governor of the RBI)

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