As per NSE, NIFTY 500 companies saw 316 exits by Independent Directors in FY19, 31.7% more than the previous year’s tally of 240. These numbers simply point to the fact that clouds of insecurity have been looming over the Independent Directors Fraternity across the country. It goes without saying that the presence of Independent Directors in an organization is encouraged by the need to counter fraudulent activities prevailing within its structure. However, some of the recent developments are symptomatic of Independent Directors resigning due to a fear of legal scrutiny and a lack of sense of security. At the onset of the recent Corporate Scams and due to the subsequent turn of events, the Independent Directors’ of the concerned organisations have had to face the brunt of the knife, rendering uncalled for explanations for the actions of the promoters and senior management. A few recent examples are the exits of three Independent Directors from Yes Bank Limited and two others from JM Financial Asset Reconstruction Company Limited. This is just the tip of the iceberg, raising numerous questions upon ethical lapses within the corporate landscape of the country, some of which are as follows.
CONCEALING CRUCIAL INFORMATION FROM INDEPENDENT DIRECTORS
A large gamut of crucial information is concealed from Independent Directors, owing to the fact that the repercussions would be unfavourable and won’t feed the ulterior motives of the management. While such informational asymmetry is hugely responsible for keeping the Independent Directors at bay, in dire straits, all eyes turn to them to answer for the deceitful activities and their outcomes.
EXITS WITHOUT A VALID REASON
The number of Independent Directors exiting without an appropriate reason is growing year on year. Out of the 649 Independent Directors who quit in 2016, 415 left without a valid reason. In fact, 325 didn’t give any reasons at all to the bourses. In 2017, 476 out of 730 exits occurred without appropriate reasons, out of which a staggering 319 didn’t assign any reasons at all. These are clear indications of a situation where a lot needs to be discovered about the loopholes needing a workaround within the Internal Management of Organisations.
RIGID & AMBIGUOUS LAWS
The provisions of Companies Act, 2013, and Securities and Exchange Board of India (SEBI) listing norms state that Independent Directors can be held personally liable for any acts of omission or commission by a Company, with their knowledge, or consent, or connivance, or in cases where they have not acted diligently. The ambiguous nature of such regulations is often gamed by the management, playing a critical role in Independent Directors leaving on short notice without stating valid reasons behind their Exit.
CASE REFERENCE: R. CHANDRASHEKHAR RAISES GOVERNANCE QUESTIONS AT YES BANK
2018 saw R Chandrashekhar’s exit from YES Bank Ltd., which raised questions on the bank’s Corporate Governance Framework, eventually leading to a transitory phase where a new CEO had to be appointed. Though the Bank termed the reason for his exit as personal, R Chandrashekhar’s version in stark contrast was astoundingly different. In his statement, R Chadrashekhar stated, “There have been media reports that my resignation is on personal grounds and that this is part of some board revamp because of the two families looking at a common board. Both are incorrect, as I decided to step down because I was unhappy at the recent developments on the board. One must understand that the bank is now in a transitory phase, where a selection committee is looking to find a new CEO after the RBI declined to give an extension to the current CEO. However, over the past few weeks, the Board Chairman, the Head of the Audit Committee and an external member of the Selection Committee have quit. These exits do not create a conducive environment and the impact of all these developments is that I wasn’t comfortable staying on the board and hence decided to step down.” The aforementioned statement is a clear predicament of the fact that matters were not being dealt with efficacy at YES Bank Ltd.
PROTECTING THE RIGHTS OF INDEPENDENT DIRECTORS?
To maintain an effective model of Corporate Governance, it is pivotal to protect the nationwide Fraternity of Independent Directors. This can be achieved by due consideration on the following grounds:
•Complete informational disclosure to Independent Directors.
•Developing a combined and unified approach towards Corporate Governance, wherein there is an equal contribution from the Executive Directors and the Internal Management of Companies.
•Providing Independent Directors with a sense of Legal Security and establishing requisite support mechanisms for them to contend with Distressful Situations.
•Ensuring their involvement in all aspects of Decision Making and recognising their efforts and contributions.
•A provision in the law for appropriate resolutions in cases of default by the promoters.
•Their area of work must be defined clearly before their appointment.
CONCLUSION:
The regulatory framework can be further improved upon, keeping a comprehensive view of the roles and responsibilities of Independent Directors and the jurisprudence around their procedural adjudication. Furthermore, it is critical that due considerations are given before resigning by Independent Directors and that they disclose all the material information that may have prompted them to step down. Independent Directors are placed to safeguard an organisation’s governance framework, but it is important to understand that they are not the only ones to be held accountable.