2,000 Independent directors quit last year, here's why they are losing their hearts?

Source :IANS
Author :IANS
Last Updated: Wed, Jul 24th, 2019, 17:28:18hrs
2,000 Independent directors quit last year, here's why they are losing their hearts?
New Delhi: The incessant unraveling of corporate frauds and misappropriations in India over the past few weeks has  opened up the proverbial Pandora's Box on the critical gaps in the country's corporate rescue framework.

The key message is that effective corporate governance must separate ownership and control in a listed company. Aiming at every shareholder's voice being heard, the Companies Act of 2013 introduced many a mechanism for protecting minority shareholders, including resolutions that require a majority of the minority to pass.

One of the key elements in this framework is that of independent directors, which used to be a coveted position a decade ago. The present corporate governance structure hinges on the independent directors who are supposed to bring objectivity to the functioning of a board and improve its effectiveness. Stakeholders place high expectations on them.

However, since 2008, when the Satyam scam was unveiled, independent directors have been the subject of ire of the stakeholders, who accuse them of not doing adequate due diligence.

Unnat Sharma, Managing Partner at AIM Corporate Services LLP, said: "In 2018-19, close to 2,000 independent directors resigned and more are in the pipeline. At one point, this position had prestige. Over the last decade, there is no charm left in the role. In fact, in the Nirav Modi case, the assets of the independent directors too have been attached by the Enforcement Directorate (ED)."

AIM Corporate Services is a boutique forensic firm with rich experience and a leader in fraud detection, prevention and response -- aspects that threaten the very existence of organisations.

The waning charm and influence of independent directors is due to multiple factors:

* The main reason is that minority shareholders don't exercise their voting rights; effectively it is the promoters who select the independent directors.

* Independent directors don't participate in meetings where contentious and unethical decisions are discussed. They are not in the know of sensitive documents and emails.

Market regulator Sebi has been aiming to change this by accepting the key recommendations of the Uday Kotak Committee on corporate governance.

Among other things, the Committee had proposed "compulsory webcast of AGMs of top 100 entities by market capitalisation from FY 2018-19."

It is also expected that Sebi will increase the minimum public shareholding limit to 35 per cent from 25 per cent currently. However, the only way independent directors can stop wrong decisions is by being informed and acting collectively.

Reena Wadhwani, Co-Founder and Partner at AIM Corporate Services LLP, said: "As the corporate rescue framework evolves, a few changes would help empower the minority shareholders and independent directors immediately and immensely. Then:

* Sebi has to not only insist that the Board must address queries raised by the independent directors, but also within a timeframe because the independent directors who are genuinely vested in their role end up going to the media when nothing else works.

* The wheels of corporate governance have to be strengthened, particularly in liquidation proceedings, where the bidders who will be taking over the company can buy out the majority stakeholders without providing clarity to the minority stakeholders.

* In the case of IL&FS, more independent directors have been appointed. This is not enough unless and until the board is committed to offering them genuine information, unfiltered by self-interest.

Given this situation, in recent times, it is the minority shareholder who seems to be taking up the role of the whistleblower. Brands like Sun Pharma, Indigo and IL&FS would've never come under the scanner if not for a minority shareholder whistleblower. Their money is at stake and they can see that someone is mismanaging the funds.

Going forward, the effectiveness of independent directors depends significantly on the independence and effectiveness of forensic auditors, legal counsel as well as internal audit.

Independent directors may not be in a position to stop management fraud perpetrated at the highest level but with a high level of commitment and due diligence, they should be able to identify the signals that indicate potential for fraud.