Are boards responsible for management action

Updated: Sep 3 2013, 08:13am hrs
Amit Jain

It is natural that in the case of any corporate failure, questions are raised on the role of various players who are in any way associated with the company. Besides promoters/key managerial personnel in charge of the affairs, in such situations, typically, there is extreme speculation/debate on whether regulators, auditors, independent directors, etc, discharged the responsibilities expected of them.

The recent suspension of trading in contracts by the NSEL has again put this issue up for debate. A brief summary of the case: NSEL was allowed to carry spot trading of commodities subject to compliance of conditions prescribed by the ministry of consumer affairs. It introduced novel products in 2010 and business increased steadily. However, subsequent events seem to indicate that certain fundamental safeguards/compliances expected of the exchange might not have been complied with, e.g., conditions prescribed by the consumer affairs ministry such as restriction on short-sell, the 11-day limit on settlement period, etc. With no resolution in sight to the proceedings over non-compliance (on since 2012), authorities directed NSEL to discontinue spot-trading of commodities. While several takes on the causes of the crisis have been aired, apportioning responsibility needs greater insight on the roles and responsibilities of the offices involved. However, the office which failed to execute its responsibilities diligently is ultimately responsible for an undesired result.

The Companies Act, 1956, refers to two specific categories of directorsmanaging directors and whole-time directors. Under the Securities Contract (Regulation) Act, 1956, directorial positions have been split into threeexecutive director, non-executive director and independent director. A combined reading of the above suggests that managing directors/whole-time directors/executive directors work full-time for their companies and are involved deeply in the day-to-day affairs of the same. On the other hand, non-executive and independent directors are expected to exercise due care and diligence in providing guidance and oversight of company affairs and need to stress on high level of compliance from key managerial personnel. Regulators have placed significant responsibility/trust on independent directors so that they act as custodians on behalf of all shareholders and specifically protect minority/external stakeholders interests. While non-executive and independent directors contribute to corporate decision-making with their wide experience and professional expertise, it is the managing directors, whole-time directors, executive directors and key managerial personnel (who may not be on the boards) who contribute further by conducting the operations of their companies.

Considering the recent corporate frauds, accounting scandals, etc, the roles and responsibilities of the directors, especially the non-executive/independent ones have become more critical. While their role may not be hands-on, regulators, media and the shareholder community will increasingly expect them to guard public interest. With the new Companies Bill, regulators have tried to bring in greater sense of accountability and responsibility. Key changes include codifying the specific duties of directors and the introduction of the requirement of appointing independent directors.

At a macro-level, without doubt, it is the board that is ultimately responsible for the affairs of the company. The expectations of regulators/ public stakeholders from the directors are high and directors have a huge responsibility to conduct themselves in a professional unbiased and independent manner. Of course, there can always be extreme situations where in spite of the best efforts and good faith, inappropriate actions of the management may not come to the fore. In such cases, the fixation of responsibility will and should be determined based on role assigned and execution of the same with professional and business prudence.

(With inputs from Murali Choudhary, manager, BMR Advisors)

The author is partner, BMR Advisors

Sidharth Birla

The Companies Bill takes giant strides in improving transparency and corporate governance in India. To name a few, the institution of independent directors has been strengthened, severe restrictions have placed on directors and more powers have been vested with shareholders.

There has been a lot of debate on the responsibilities of directors in the recent times. Under the Companies Act, 1956, liability for any default is usually not attributed to all members of the board. In fact, in most instances, under the Companies Act, 1956, liability is attributed for non-compliance with the provisions of the Act only to an officer in default.

The Companies Bill, 2012, for the first time clearly defines the term Key Managerial Personnel, Independent Director and officer in default. It also lays down in great detail the roles, functions, duties and other such details in the Code for Independent Directors as part of Schedule IV in the Bill. The Bill provides that an independent director shall be held liable only in respect of such acts of omission or commission by a company which had occurred with his/her knowledge, attributable through board processes, and with his/her consent or connivance or where he/she had not acted diligently. Independent directors bring an element of objectivity to board processes in general interests of the company and also to the benefit of the shareholders, especially the minority and small shareholders. Further, in this emerging regulatory environment, it is also important to strengthen the whole institution of independent directors which is one of the most important pillars on which the edifice of corporate governance stands.

However, some incidents have led to people of eminence shying away from becoming independent directors. To contain this undesirable situation, enough respect needs to be given to them, to enable them to contribute effectively to the boards. It is pertinent to provide them the right atmosphere to be able to retain good talent and also enable them to perform their enhanced roles and responsibilities, especially in the current market driven economy. The right and conducive environment will help them to play a constructive role towards better functioning of boards and companies.

There is a remarkable feature in the Corporate Manslaughter and Corporate Homicide Act, 2007, in the UK. This Act creates a new criminal offence of corporate manslaughter, which applies when someone has been killed because the senior management of a corporation has grossly failed to take reasonable care for the safety of employees or others. The UK government has stated that the offence is concerned with corporate liability and does not apply to directors or other individuals who have a senior role in the company or organisation. However, existing health and safety offences and gross negligence manslaughter will continue to apply to individuals. Also, prosecutions against individuals will continue to be taken where there is sufficient evidence and it is in the public interest to do so.

Such kind of a fine distinction would go a long way to ensure that there are no unfortunate incidences where directors are likely to be hauled for no fault of theirs. This also illustrates the indispensable need to have a law on a similar footing in India so that a director is not erroneously booked under the criminal legal system in such situations. The absence of such provision in the Indian law highlights the serious impact it could have on directors of the company where the intention is not of breach of trust and default, and the actions were honest and fair. In other words, the cardinal principle of mens rea should not be overlooked while judging the actus reus. This will also uphold the fundamental intent of all concerned, that good-faith acts in the best judgement or omission or commission should be protected from needless penal actions, and indeed any mischief under the Act. Having a non obstante clause in the Companies Bill would address this perhaps unintended situation and be a great relief for corporate India.

The author is senior vice-president, Ficci