To be sure, many firms, especially family-owned ones, skirt the provisions on independent directors by appointing persons who are independent in name only.
Recent cases like ICICI Bank, IL&FS, and Jet Airways, among others, are sure to have rocked confidence in corporate governance in India. Investors and other stakeholders would perhaps now back keener regulation, especially for independent directors whose oversight is supposed to check malfeasance by other board members or company executives. To that end, the government’s move to make a self-assessed proficiency test for those wishing to become independent directors compulsory should seem welcome. From December onwards, they will have to apply to the Indian Institute of Corporate Affairs (IICA), under the corporate affairs ministry, before signing up for the job or within three months of the new rules coming into force. Once part of IICA’s database, they will have to pass the test within a year. If a person has served as director or in a key managerial position in a large listed or unlisted company for more than 10 years, she is exempt from the taking the tests. However, the new regime fails to address the problems that afflict the system at present.
To be sure, many firms, especially family-owned ones, skirt the provisions on independent directors by appointing persons who are independent in name only. These ‘independent’ directors then serve mostly as rubber stamps, more so because they are often not familiar with laws governing companies, the conduct of business, even basic accountancy and other facets of corporate governance that they are supposed to ensure are complied with. A test helps here if clearing it means that the person has reasonable competence to fulfil the responsibilities of an independent-director; the person, thus, is less likely to allow herself to be manipulated in board functioning if she knows that she can’t plead ignorance in the case of improprieties coming to light. The new regime, however, falls glaringly short of plugging the gaps, by missing the fact that the behemoths where corporate governance failure recently made headlines had heavyweights, with decades of corporate governance and industry experience, as independent directors. So, the lack of competence hardly seems to have been the problem. In the ICICI bank case, the board gave unwarranted support to former MD & CEO Chanda Kochhar, who was facing allegations of serious misconduct, when it should have asked her to step aside till the time her name wasn’t cleared. Similarly, the IL&FS board featured many heavyweights, including Maruti-Suzuki chairman RC Bhargava, and former shipping secretary Michael Pinto, as independent directors. The fact is that the company’s risk management committee, of which Bhargava and Pinto were members, met just once between 2014 and 2018, when the IL&FS group’s debt rose 87%! If decades of demonstrated expertise don’t guarantee competent execution, what sense does exempting top management veterans make?
In any case, it makes little sense to hold only independent directors responsible for the actions of the company. The best thing for the government to do—to ensure both independent and other directors do their job—is to punish those who have allowed various irregularities in the companies on whose boards they are on. The penalties should include not just disgorging of all sitting fees, but also, if the lapses are a lot more serious in the case of IL&FS for instance, barring directors from being on the board of any company for a certain period of time.