Accountability of independent directors
The ongoing global financial crisis has had its effect on a wide variety of persons and events. With losses mounting to more than $400 billion, financial companies have given pink slips to more than 83,000 employees while top bosses at global financial brands such as Citi, Merrill Lynch and UBS have also packed their corner offices and left.
While there can be no doubt that these top bosses own responsibility for the misadventures of the entities they run, a debate is raging abroad about the role that independent directors play in this scenario and whether the top boss is solely responsible.
The debate also criticises the Sarbanes Oxley Act (SOX) of neutralising directors’ efficiency by increasing the burden of financial and regulatory compliance and neglecting the bread-and-butter role of monitoring company strategy.
Surveys of the composition of the boards of eight prominent financial institutions revealed that two-thirds of these boards had no significant experience in banking business and less than half had financial industry service. Stithapragna
Independent directors are defined by their name — independent. They are supposed to function like Stithapragna — the concept mooted in the Mahabharata — whose job role can be defined to be one who is sleeping when others are awake and awake when others are sleeping. He is duty-bound to raise the red flag when he spots an inherent issue which the others could not do merely because they possess a non-independent status.
While this is a tall order, if one visualises a situation in which out of a board of eight, seven agree for vetting a not-so-foolproof risk management policy and all eyes point to the independent director for his nod, chances of his raising a storm are limited as he would opt for a go-with-the-masses policy.
The International Accounting Standards Board (IASB) and other bodies such as the Income-Tax Appellate Tribunal (ITAT) have a solution for this by encouraging the dissenter to document his dissent. While a hare-brained proposal could be dissented, it is the day-to-day decisions taken by the board with no clue as to the implications in the future which could defy normality.
A recent notification from the Institute of Chartered Accountants of India (ICAI) urging companies to mark-to-market derivative losses led to litigation between banks that sold exotic derivatives and the entities that bought them with eyes blindfolded.
Examples in Wall Street have shown that a vast majority of the directors could not fathom the intricacies of a derivative transaction. Indian Situation
The revised Clause 49 of the Listing Agreement in India mandates that if the chairman of the board is a non-executive director, at least one-third of the company’s board should comprise independent directors. If the chairman is an executive director, at least one-half (or 50 per cent) should be independent directors.
The eligibility criteria are laid down in the revised Clause 49 of the Listing Agreement. While the crème-de-la-crème of independent directors have enough directorships of eminent companies, it is the mid-rung and lower mid-rung companies that seek truly independent directors.
All events — whether a crisis or a scam — occur the biggest in the US as its exposure to the complicated world of finance is extreme.
However, financial institutions and banks in India are feeling a minor tremor from the global situation which could act as a warning signal for the future.
A robust and transparent risk-management policy — validated at frequent intervals, being transparent with significant issues amongst all stakeholders in the company and constant communication — seems to be absolutely critical now.
