<div>There are of course countless ways to give up the good fight. When it comes to Corporate Governance and Compliance, Parliament has decided that the best way to do it is to find a third party sucker and drop the dying donkey in his laps! Why else would the Companies Bill 2011 provide that the entire ethical burden of the company be carried on the shoulders of Independent Directors? This may be radical and innovative, but as Ganga is my <em>maiyya</em>, somebody gonna get hurt!<br /><br />Since 1956, we have run a great Company law which helped our political-industrial complex thrive without being unduly bothered by the finer points of probity. Boards of Indian companies revelled in credible deniability. No individual director had either power or responsibility and the role was performed in the collective wisdom of the Board. In the upshot, every individual could claim that it wasn’t his scam to run or support and proof of conspiracy being as hard as it is, the system ticked along rather nicely.<br /><br />To wit, Sebi did try to spoil the mood in this happy paradise when it pushed Independent Directors to take an iconoclastic line as part of clause 49 of Listing Agreements. It made a poor start though, because it defined Independent Directors as people who had no “other material pecuniary relationship” with the company, its promoters, management or subsidiary outside the directors remuneration which “<em>in the judgment of the Board may affect independence of judgment of the directors</em>”. When conflict of interest becomes a matter of opinion, you can be damn sure the law isn’t worth a damn, and it wasn’t.<br /><br />That didn’t end the matter. Sebi’s clause 49 also let directors off the hook except in circumstances where an “<em>offence has been committed by the connivance or is attributable to any gross negligence of the officer</em>” (Sec 21 SCR Act). On top of that, other than the Audit Committee, Independent Directors really had no role at all. This was par for the course because everyone knew that Independent Directors were creations of promoters who served under their pleasure. You could say this bit of “tokenism” kept India’s crony democracy in place while feeding our appetite for moral posturing. It was all good thus far in the desi badlands.<br /><br />Meanwhile, storm clouds were looming. To take India to the next level, our intellectual elites determined that we needed transparency, honesty and probity in corporate life. How to get there? The Company Bill 2011 is the result. First, we have decided to assign a specific individual responsibility based role to every director. Thus, Section 166 expects directors to act in accordance with the Company’s Articles, promote objects of the Company for the benefit of every one and their uncles including minority shareholders, employees, the community and protect the environment too! It sounds like the kind of speech Michael Jackson would have made when he won his first of eight Grammies for “Thriller”! Sec 166 then goes on to specify other duties. The good news though is that if a director breaches these duties, he shells out some cash - five lakhs at most - and he’s out of there.<br /><br />Independent Directors don’t have it so easy. First, Sec 149 sets out a comprehensive definition of who is qualified to be one so it’s hard to be an independent director this side of Gandhigiri. Next, it steers Independent Directors to a seriously heavy weight Schedule IV which creates a whole new role for them. Speaking compositely, the new bill does four things. First, it identifies Independent Directors as GRC drivers. The upshot of this is that the guy who sits on the outside with an independent role and has no money in the company carries the moral burden while the guy who sits on the inside and on the money slips through the compliance fingers. That’s pretty curious. Second, it enjoins Independent Directors to become protectors of minority shareholders, a sort of stake-less David taking on the might of the successful entrepreneur.That is institutionalized in-board hostility on the principle of it. Third, it expects him to be an independent voice expected to “scrutinise the performance of management in meeting agreed goals and…monitor the reporting of performance”. Curiouser and curiouser thought Alice! Finally, it expects him to hold separate meetings without management or the other directors and review the performance of the rest of the Board. So now, the Gandhigiri saint who is hostile to the promoter and reviews promoter performance at board meetings also meets behind the back of the company’s prime movers and second guesses whatever they do. If this was Jim Morrison’s idea, you could say that out here in the parameters, we are stoned immaculate!<br /><br />This enlarged role may be great for the ego of a kick-ass external director of Sebi’s dreams,intent Dirty Harry style on making his day but it comes with grave risk. Sec 149 also provides that “Independent Director shall be…liable only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.” (Emphasis Supplied). So what does “acted diligently” mean for an Independent Director? Please refer to Schedule IV.<br /><br />Schedule IV is one hell of a diligence list to meet. Allow me to share some potential infractions with you. Schedule IV, Part 1, Guidelines of Professional Conduct Clause 1 requires Independent Directors to “uphold ethical standards of integrity and probity”. Clause 9 of the same part expects them to “assist the company in implementing the best corporate governance practices”.Schedule IV, Part II, Role and Functions, Clause 4 expects them to “satisfy themselves on the integrity of financial information”.Forget the rest: would you say that this last clause 4 is enough to damn every Independent Director of every Indian company or not?The next time the Great Satyam Scam reincarnates, every Independent Director is going to have a long haul summer in the cooler. That apart, when we get to Sec 23M of the SCR Act, we are talking ten years in jail and 25 crore in penalties.<br /><br />To me, the Independent Director’snew role is impossible because of the manner in which our democracy is structured. I dealt with this in last month’s Fineprint when observing that the Companies Bill was unfairly <a href="http://www.businessworld.in/en/storypage/-/bw/terrorising-auditors/778551.16627/page/0"><strong>Terrorizing Auditors</strong></a> and I would encourage you to check it out if you haven’t already. Very briefly, our democracy consists of coalitions of colluding castes who come together to seize power in each state in order to appropriate the state’s enormous resources to themselves and their supporters. In turn, state level groups collude to establish a Union Government who then usurps Union resources in the same way. Extortion of the corporate sector is part of the deal. The ruling dispensation in Delhi right now is not run by fools who have distributed billions to fraudulent ‘social upliftment schemes’ and bankrupted the Government without very good reason knowing fully well that this allows all sorts of dodgy state sponsored criminals to misappropriate most of this equity and distribute it to a variety of political constituencies. Some of these misappropriation schemes are also run as corporate empires and there is more on this in <a href="http://www.businessworld.in/web/guest/storypage?storyUrl=the-pontyfication-of-politics-processes&CategoryID=0&articleId=660548&version=1.8&journalArticleId=764013"><strong>The Pontyfication Of Politics Processes</strong></a>. Asking Independent Directors to stem the tide of political payments and radically alter the structure of our democracy is more than an exercise in fantasy. At the very least, you can’t ask them to carry this burden without placing a similar burden on those who do the extorting. Till this is done, they can take a bribe, you can’t give it and you can’t run your business without giving it either. Basically, you are toast: any which way but lose.<br /><br />I must admit though that there is reason for hope though. It may well be that the mismatch between – how should I put it - political amorality and corporate culpability is in the process of being bridged. Already, when I see the Chautalas in jail and the Kalmadis facing charge sheets, I begin to believe that the inflection point has been crossed. But two swallows don’t a summer make and I don’t yet see a systemic prosecution of political corruption. You can be optimistic, but you aren’t immune from extortion. Maybe, the new world of blissful honesty will dawn, and dawnsoon, but till it does, Independent Directors will face clear and present danger of being the fall guys in times of radical change. As the situation stands today, the choice before an independent director then is to either stop a bullet or immediately draft a really polite letter of resignation. In pursuit of a pragmatic instinct for self preservation, I am for the resignation.<br /><br />(<em>The author is managing partner of the Gurgaon-based corporate law firm N South. He is the author of “Winning Legal Wars” and “Bullshit Quotient: Decoding India’s corporate, social and legal Fine Print”. He can be contacted at rcd@nsouthlaw.com</em>).<br /><br /> </div>
