MUMBAI: Former executives, ex-bureaucrats and others are increasingly quitting or declining to accept jobs as independent directors (IDs), reflecting a growing trust deficit in India Inc, said former occupants of such roles, analysts and experts. Former CEOs and directors told ET on condition of anonymity that they are refusing offers over reputational concerns and fears about legal liabilities as independent directors are increasingly being held accountable for the actions of promoters and management.
Several recent developments have been symptomatic of corporate governance challenges. These include the unexpected default at Infrastructure Leasing & Financial Services (IL&FS), which triggered a liquidity crisis for nonbanking financial companies (NBFCs), and the bid to renew Rana Kapoor’s tenure as CEO at Yes Bank that was turned down by the regulator.
As per Nseinfobase, Nifty 500 companies saw 316 exits by independent directors in FY19, 31.7% more than the year earlier, when 240 had quit.
Of the FY19 total, 99 left after terms expired. Others cited preoccupation (54), personal reasons (31) and health (10) for leaving. About 50 quit without giving any reason.
“Due to heavy personal liabilities, independent directors are resigning from companies where they anticipate some wrongdoing,” said Pranav Haldea, managing director of Prime Database Group, which runs Nseinfobase. “In a few cases, companies are also asking independent directors not to continue if they have already been serving on the board for a long time.”
Such departures are appropriate if the board failed in its basic fiduciary duties. “The falling ethical standard in boardrooms is appalling,” said RPG Group chairman Harsh Goenka. On the other hand, “managements have been taken advantage of by companies far too long but the failure to differentiate between these situations makes serving on boards an unacceptable reputational and legal risk unless you can be quite certain of the character of the promoter, the CEO and the chairman.”
R Chandrashekhar of Yes Bank and Anil Khandelwal of JM Financial ARC cited governance concerns at the time they stepped down late last year.
“Most promoters treat boards like a friends’ club,” Khandelwal said. “Fundamentally it should not be left to promoters to choose independent directors.”
'NEED FOR GREATER SAFEGUARDS'
“Post-retirement, most directors join boards to keep their home kitchen fires going. If one raises an issue… you become unpopular with other directors,” Khandelwal added. Khandelwal wants greater transparency when it comes to such departures.
“Independent directors who claim to have quit for personal or health reasons not citing governance issues should not be allowed to join other boards for at least two years,” Khandelwal said. Yes Bank was forced to issue an apology to the stock exchanges and retract a statement that Chandrashekhar’s resignation had been on “personal grounds”. At the time, he had said in a WhatsApp message: “I wasn’t happy with the developments taking place in the recent past and the way it was handled.” He didn’t elaborate.
Good people may be forced to abandon boards, undermining a system that was meant to bring balance to the boardroom, said Excellence Enablers chairperson M Damodaran, a former Securities and Exchange Board of India (Sebi) chairman. He sought greater safeguards for independent directors.
HIGH EXPECTATIONS
“The role of the independent directors has not changed,” he said. “Expectations have increased in recent times. The fact that an independent director is a non-executive who suffers from information asymmetry vis a vis executive directors seems to be ignored when the company is in dire straits. The board’s role is providing guidance. If independent directors are treated as persons who have connived, conspired or colluded, when they were at best negligent, it would be grossly unfair.”
An independent director on the board of a holding company can’t be held responsible for what happens in multiple subsidiaries that have their own boards, said Maruti Suzuki chairman RC Bhargava, who was earlier an independent director at IL&FS.
“While there is no doubt that independent directors have to be accountable for their role,” he said. “There is only so much one can trust as much as is shared by the management with them,” he said.
Biocon chairperson Kiran Mazumdar-Shaw said corporate law needs to distinguish between management and board responsibilities, especially when it comes to independent directors. “All operational matters are the responsibility of management and executive directors,” she said. “Hence to hold independent directors responsible for operational noncompliance is absurd. As long as it is flagged as a risk by board and management reports on action taken that’s fine. But to take punitive action against independent directors is not correct.”
Independent members have to read agenda papers closely, engage with plans and ensure that they contribute their wisdom because any negligence can get them into serious trouble, pointed out JN Gupta, founder, Stakeholder Empowerment Services (SES), a proxy advisory firm.
PREFERENCE FOR ADVISORY BOARDS
Some professionals prefer to be on advisory boards rather than a listed company’s board.
“Considering the compliances which are required and the responsibility and liability which an independent director has, it has become extremely difficult for an individual to accept directorship in a a listed entity,” said Sanjay Ashar, partner at law firm Crawford Bailey & Co. “Listed entities in turn are finding it difficult to get appropriate independent directors who can bring real value.”
Despite legal clarity that independent directors are not liable for the day-to-day activities of companies, the courts are taking a different view and that’s leading to several leaving, said Ravi Singhania, managing partner of law firm Singhania & Partners.
Navnit Singh, chairman and managing director of India for recruitment company Korn/Ferry International, cited several recent instances of top candidates turning down offers after due diligence. “There are some boards that no one wants to touch — it’s too much of a risk,” he said.
Ireena Vittal, a veteran independent director on several boards, said India’s governance framework is in the early stages of development. “And, as the dust settles, a balance will emerge,” she said. “The system will learn how to differentiate between negligence and criminality, between genuine mistakes and wilful intent.”
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