Crucial role of a boardroom dissenter

R Anand | Updated on November 21, 2019

Alarm bells Dissent notes provide deeper insights into governance issues   -  triloks

Independent directors must record their views on issues of financial and ethical import. That’s their role under the law

In the late 1960s I happened to be part of an interesting and stormy family meeting presided over by the karta of a Hindu undivided family (HUF). The karta announced that he had taken a decision to sell an acre of agricultural land belonging to the family to repay a cooperative bank loan and to defray some family expenses. After a minute’s silence came the objection of an adult member, questioning the decision. The karta responded: “As the eldest member of the family I have absolute right. I have taken the interests of all family members in arriving at this decision. I shall not tolerate any ‘dissent’.”

A close analysis of the Hindu law establishes that the karta is the sole authority who can take decisions on behalf of the family by virtue of his position, age and wisdom. Any other member can at best ask for partition of the property, if he has a serious disagreement with the karta. There is no concept of a dissent in a HUF.

If one applies this situation to a corporate board with various directors, largely consisting of family members and independent directors (ID), then it becomes a different ball game altogether. The chairman of the board cannot decide like a karta and the regulatory system provides for a ‘dissent’ if a director does not agree to a proposal.

Right to dissent

The word ‘dissent’ means to express an opinion at variance with those commonly or officially held. By its very nature, it has a negative connotation and represents an element of serious disagreement. In board rooms, a “dissent” by a director can be a double-edged sword — one side used as a deterrent to prevent a potential misadventure, and the other as a “diabolical obstructionist” mechanism that can reject even genuine proposals.

The litmus test lies in maintaining the appropriate balance between these two. It will be interesting to pull out how many dissents have been recorded by directors post 2013. This also brings us to the most important question: Should all dissent notes of directors be made public?

Schedule IV of the Companies Act, 2013, dealing with the Code for Independent Directors states in item III (6) that, the IDs shall “where they have concerns about the running of the company or a proposed action, ensure that these are addressed by the board and, to the extent that they are not resolved, insist that their concerns are recorded in the minutes of the board meeting”. In effect, this constitutes recording of the dissent by the director at board meetings.

As per the expert committee of MCA, paragraph 24 of Chapter 4 states that “Independent/non-executive directors should be able to: call upon the board for due diligence or obtaining of record for seeking professional opinion by the board; have the right to inspect records of the company; review legal compliance reports prepared by the company; and in cases of disagreement, record their ‘dissent’ in the minutes.”

It is clear that the law provides the framework for a director to exercise his right of dissent. The question is how to use it and when?

Appropriate time

A director on the board is confronted with three distinct decision-making situations: Where an issue or agenda item is crystal clear and is passed without much discussion (this is the most common situation, where decisions are passed by unanimous resolution); or, where an issue or agenda item is put up but raises concerns or discomfort to the director. This is a typical cat on the wall situation. He is not in a position to stick his neck out and record a dissent but expresses his discomfort, leaving it to the majority to decide the matter. Sometimes, he just keeps silent and does not even participate in the discussion.

Another possibility is that the director expresses his concern in writing but refrains from voting on the subject. A case like this would be a ‘disagreement’, not dissent.

The third such situation is one where an issue or agenda item is brought up — say a controversial related party transaction or unrelated diversification without sufficient notes or details, where the transactions do not measure up to any test of compliance or ethics. This is a no-brainer. The director should record his “dissent” clearly, stating he opposes the move to go ahead with the transaction. If the board by majority pushes through the transaction, the director will be well protected in the case of any further investigation or probe.

It is well established that dissent notes will come to the rescue of the director in cases of questionable transactions. To this extent, they operate as a self-defence mechanism.

Challenge of perception

A dissent by its very nature poses a perception challenge, as it could be construed as directed at the individual. The fact is, it is directed at the subject matter and the agenda item, not any individual. The promoter and the board must deal with dissent objectively and professionally. When dissent notes enter the minutes of board meetings, they are bound to pose regulatory challenges. Dissent notes will come in handy for auditors, investors and the society at large, since it in some sense acts as a ‘Red Alert’ and also offers deeper insights into an otherwise blind spot.

The other way to counter dissent is to justify the action by forcefully arguing why the agenda item should be pursued. These arguments can also be brought on record as part of the minutes. By presenting both sides, the true spirit of governance and democracy will be well documented.

On a related subject, after the director records his dissent against a particular proposal, will he be treated differently? This aspect is irrelevant in a public sector undertaking or a government company, but can be a major issue in a promoter-driven family organisation. Corporate democracy has reached a stage of evolution where it must embrace contrarian views in the larger interest.

The plus point of dissent is that it provides a check on the owner or promoter resorting to autocratic means to achieve a set of objectives. The negative factor comes in when a director resorts to dissent more to exercise threat or as a disruption. This should not be encouraged or permitted. Every item should be discussed and debated in a healthy spirit so the right decision is taken. At no stage, should the threat of dissent affect the progress of the company.

UK example

Under the UK Corporate Governance Code, a director who is in the minority must ensure that he clearly makes his case to the board. The director will need to bring all of his skills of persuasion to convince the other board members of his point of view. In particular, if he suspects that he is likely to be in the minority, a director may wish to circulate a summary of his position in advance of the meeting.

If the director decides to take further action, then he should consider some or all of the following steps: ensuring that the dissent is properly minuted; circulating a full note setting out his views; insisting that appropriate advice be sought from legal advisors; calling a general meeting of the company.

The shareholders cannot overturn decisions made by the board, but a majority of shareholders can remove a director. The model articles of association also dictates that shareholders carrying 75 per cent or more of the voting rights can pass a special resolution demanding that directors take — or refrain from taking — a specified action. In effect, the shareholders are taken into account while considering the case of any dissent.

In the present day challenges of business, composition of the board is a key element in good corporate governance. The time-tested approach of picking the board with “convenient” directors has its own advantages, since it effectively scuttles any possibility of a dissent.

But obviously, it is not good in the overall interest of the company. The laws and regulations can only go thus far in providing the facility of a dissent and the attendant protection thereon. Maybe it is time to slowly inculcate a spirit of dissent wherever such a possibility arises. Resignation from the board should be the last resort, not the first.

The writer is a chartered accountant

Published on November 21, 2019

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