The beauty lies in the paradox! No one can grudge SEBI for tightening the noose around independent directors (IDs) - but aren’t we left wondering as to which ID would want to take on the growing hazards!
And if downside is not on one’s mind, are there enough quality IDs on the supply sideIJ The new norms on IDs will now involve having to state at the time of quitting what really transpired! This, at least theoretically, is aimed to curb the tendency where IDs typically cite ‘personal reasons’ and then melt into the horizon. Fair enough. But how about someone trying to keep things discrete - if for nothing, not to be sued by the company in questionIJ
Well, the new diktat is that if you still limit the carping in your resignation to ‘personal reasons’ you must quit all other independent directorships as well! Another norm demands serious curbs on the number of independent directorships that can be accepted by one particular individual. Seven in all and only three if you’re already a serving director in a listed company.
On the face of it, who could have a problem in SEBI coming to the ‘rescue’ of IDs stretching themselves among dozens of companiesIJ Aren’t they better off giving ‘quality time’ guiding the fewer boards that they are now allowed to serveIJ But the flip side that SEBI seems to have forgotten is that a purportedly distracted ID may now have to be replaced by a green horn!
Read with this the new companies act counting directorships in subsidiary companies as well. This brings me to ask the delicate question whether IDs are ‘independentIJ’ Governance 101 would tell you that IDs do not have ‘any material/ pecuniary relationship or transaction with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates, which in judgment of the Board may affect independence of judgment of the Director’ but the arm’s length is only on paper.
Other definitions, enshrined in Clause 49 of the listings Agreement, include that the ID has not been an executive with the company in the immediately three preceding financial years; is not a partner or executive of the auditors/lawyers/consultants of the company for the last three years; hasn’t been a supplier, service provider or customer of the company; and does not hold 2 per cent or more of the shares of the company.
Also, that an ID is someone with many years of experience and who acts as a guide for the company and the role that she is playing includes improving corporate credibility and governance standards, function as watchdog, and play a vital role in risk management. All that and more for a pretty small sum of money. IDs, in fact, are expected to be playing an active role in various committees, including as per Clasue 49 of the listing agreement, having a role in the audit committee.
This with a role in overseeing the company’s financial reporting process and disclosure of its financial information; recommending to board on the appointment, re-appointment and if required replacement or removal of statutory auditor and fixation of audit fees, and discussing significant findings of internal auditors, including internal investigations made by them into areas of fraud, irregularities or major failures of internal control systems.
Which ID, if seriously reviewing other duties such as ‘reasons for defaults into payments,’ .’the whistle blower mechanism,’ and being part of the ‘mandatory review of related party transactions and internal control weaknesses,’ won’t - unwittingly or otherwise - rub the company the wrong wayIJ Yet, the redoubtable chief SEBI chief UK Sinha now expects her to go public with the reasons.
So, parting question - wouldn’t managements sign in ‘safer’ IDs now onIJ If so, whose purpose is being served by the new normsIJ
(Follow the columnist @therohitbansal)