Independent Directors: A test of competence?

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January 10, 2020 3:40 AM

Anything that can add value, build trust and confidence and enhance corporate governance should be welcomed

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A new rule in company law has given rise to a few concerns and invited criticism. This rule, effective from December 1, 2019, requires all existing independent directors (IDs) or persons who wish to become IDs to clear an online proficiency test conducted by the Indian Institute of Corporate Affairs (IICA). This self-assessment test needs to be cleared within a year of ID’s name being added to the data maintained by IICA. The rule recognises the standing and experience of persons. It, therefore, exempts those directors or key managerial personnel who have worked in these capacities for at least ten years in listed companies or in unlisted companies having a minimum paid-up share capital of Rs 10 crore. There is no limit on the number of attempts to clear the test, but a minimum score of 60% in aggregate is required.

Nothing seems wrong with this move. The rule has only introduced the concept of passing a test to formally qualify and establish that qualification expected of a person desiring to become an ID, which in any case is statutorily provided in the Companies Act, 2013. The existing rules under the Companies Act provide few qualifications for IDs, which include their experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations related to company’s business. In fact, one of the statutory duties of IDs is to regularly update and refresh their skills, knowledge and familiarity with the company. Therefore, the law already requires IDs to possess minimum qualifications to be an ID.However, despite these provisions, there seem to be some concerns. Some industry bodies, chambers and even IDs themselves are thinking of suggesting to the ministry of corporate affairs to reconsider this rule. Their concern stems from the fact that it is inappropriate to expect IDs, who are mostly persons of reputation, standing, and experience, and are otherwise eligible in law to be appointed as IDs, to write and pass a technical test to establish eligibility. This, according to them, could belittle their status or position. The viewpoint has merit and should be discussed.

Even without the new rule, the Companies Act has stringent eligibility criteria for IDs. For example, the law provides that only those persons, who in the opinion of the board of directors, are persons of integrity and possess relevant expertise and experience, should be appointed as IDs. This, according to the critics, is a good enough requirement which can ensure only suitable persons are selected. Any additional condition of passing a test is unwarranted. Therefore, their view is that this rule should be scrapped. Although, this seems an interesting argument, nonetheless, nothing seems wrong in passing this test to establishing proficiency. Another argument is that there is no such requirement for any other director to pass the test, then why should it be for IDs. True, that other directors need not pass any such test, but there is no denying the fact that the roles, duties and responsibilities of IDs are far greater than any other director. It is only prudent they establish their eligibility by passing a simple test. In fact, IDs and their conduct are critical elements of corporate governance norms.

Anything that can build trust and confidence and enhance corporate governance should be welcomed, and not criticised. Therefore, this test shouldn’t create so much of fuss. The moot issue is not passing a technical test, but the overall conduct of the board, especially the IDs. Even if an ID meets all the legal eligibility criteria; her conduct can still cast aspersions. ID’s biases for or proximity to promoters or a particular shareholders’ group; having business/profit motive or other interests that can affect independence should be the real cause of worry. Amendments in law will never be able to address this issue altogether. It is more a behavioural rather than a legal issue. Corporate governance can be best achieved by adhering to fair principles and not just the law.

Author is Partner, J Sagar Associates.
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