Handbook for Independent Directors: Upholding the Moral Compass
ONE OF the most important positions within the board of directors in any company is that of an independent director. The independent director has come to be a symbol of a ‘guardian of shared values’ for a company, which is essential to resolve the classic conflict that exists between the owners and management. Curiously, this is also an acceptance of the reality that the executive directors on a board may not always be able to discharge their duties in a dispassionate manner. While the board is supposed to address such conflicts, there has always been discussion, given the preponderance of the promoters on the board, on whether independent behaviour is actually manifested in the way boards function today.
Kaushik Dutta, in his book on independent directors, provides guidelines on what is expected from an independent director. The book covers everything, right from the concept of an ‘independent director’ to his responsibilities and expected conduct. To build this guidebook, Dutta gives a number of examples of how independent directors have made a difference to the functioning of boards. The book is further embellished by views expressed by persons of eminence who have served on various boards.
The concept of independent directors stems from the need to address public interest within the framework of corporate governance. Surprisingly, this idea was first mooted by Adam Smith, the father of capitalism, when he pointed out the apparent conflict between managers who ran the company and the interests of the owners: owners did not take part in running the company and managers were only in for the short term. But today, the issue has taken on another dimension, as there are majority and minority shareholders involved, and the latter may be kept out of the ambit, with the former influencing the management in a decisive way. It is, therefore, necessary to distinguish between general shareholders and minority shareholders, an issue that has been the concern of Sebi
The author also gives us the characteristics of an ideal independent director. Besides the experience and integrity criterion, they have to be bold and forthcoming, and should have the stature and courage to raise issues and have discussions.
Another area where the independent director has a role to play is in the area of insider trading. This has become irksome of late, though not very prevalent. They have to ensure that there are controls in place to ensure the highest values are adhered to by the company and management.
Also, in light of the Satyam fiasco, the author brings in the issue of culpability of the independent director and the fear of taking on this position, as their liability could be extensive in case of fraud. Interestingly, in this specific case, Dutta raises the issue of whether the four independent directors were right in resigning when the fraud was admitted. One view is that they should have carried on and ensured that things were corrected instead of running away, which looked opportunistic in retrospect and sort of vitiated the role of independent directors. The Companies Act of 2013, however, does clarify that the liability of the independent director is linked with his or her being an accomplice in a misdeed, and what is done in good faith after due diligence would not be held against them.
Dutta devotes another section to the board committees and the role of independent directors in these. In this regard, corporate social responsibility has become important today, given that companies have to allocate a certain amount of money for this purpose and follow up to ensure that all is in order.
Dutta also comments on the tenure of independent directors. While it is often argued that they should not have long terms, as their interests get embedded, a shorter tenure may also lead to absence of interest.
However, the most important area where one would expect affirmative action from an independent director is in the role of a whistleblower. This is where they have to be on constant watch and take cognisance of any deviations, complaints or any other activity or practice that may be inimical to the interests of the stakeholders, which include not just shareholders, but also suppliers, customers and employees.
Often, the position of an independent director is treated as a good post-retirement occupation with little responsibility and an effective way to stay in ‘business circulation’. However, lately, there has been some fear of taking on such positions—in several cases, independent directors have been held criminally liable for offences perpetrated—and those who do take these positions, prefer to remain silent and toe the line.
Dutta in this book convinces the reader that the main objective of an independent director is to speak out because only then will this position make a difference for all the stakeholders. Above all, they need not fear retribution when things go wrong, provided the duties were discharged in good faith.
Of late, there is also growing demand for having a fixed proportion of independent directors on the boards—today, this also includes women directors.
Handbook for Independent Directors is very timely and instructive for all independent directors, as it actually provides a textbook for them. It would be even more useful for first-time directors.
Madan Sabnavis is chief economist, CARE Ratings