Companies need qualified independent directors, not rubber-stamp directors

Salman Khurshid has rightly pointed out a quote from Kautilya’s Arthashastra which says-

“Citizens never support a weak company and birds do not build nests on a tree that does not bear fruits”

This phrase compels us to think about how companies have often been victims of the rubber stamp culture.

An important dimension of corporate governance reform has been the introduction of Independent Directors (IDs). The legislators realized that in order to reduce fraudulent activities within a company, it is necessary to appoint someone who can have an external influence on company decisions and oversee the company’s board as an outsider. This is how the concept of IDs was concocted. IDs are presumed to be impartial and fiduciaries of shareholders’ interests. In India and many other countries, 1/3rd of the board directors of a publicly listed company are required to be IDs. They do not have any role to play in executive responsibilities.

Even though the rationale behind having IDs on board is bonafide, in actuality is too idealistic. Anticipations on paper turn out to be different in the real world. A reality check into the corporate world gives us a glimpse at the dominance of the promoters in a company having a concentration of ownership. Especially in Asia, we can see a number of family business groups rule the corporate landscape. These promoters/family members usually have a substantial ownership stake in the company and thus they can be too ‘controlling’. They will always try to control and manipulate board decisions and extract private benefits for personal gains. And where such concentration lies, the interests of minority shareholders are often sidelined. Corporate fraud and scams often breed in such places.

In a usual scenario in such companies, whenever a proposal or strategy is proposed on the board table, the promoters expect the BOD to approve everything smoothly without raising a question. No meaningful discussions are taking place and the management is successful in getting its proposals approved in an arbitrary manner. The directors who give approvals in such a manner without authenticating the documents and monitoring the flaws are termed rubber stamp directors. If any board member or ID who is suspicious of any activity or dubious about the board process, tries to raise an alarm or brings it to the notice of the concerned person, he falls into the pit of promoter politics. He is asked to resign and the resignation is often provided because of the vulnerable state he is in. They know that they will be removed even if they decline to resign. As the removal of the director requires a simple shareholder majority and where substantial shareholding lies with management, the game is completely in their hands. How so ever unethical it may sound, a number of boards function in this manner. The rules, approvals and procedures only seem to exist for formality's sake because the purpose with which codes of governance are introduced is very conveniently ignored. Publicly and on paper, they can easily paint a picture that they are acting in compliance with company laws but the truth says that corporate governance is really screwed up. This is clearly a loophole in the governance regime and stringent regulations should be introduced to strengthen the governance and the position of IDs.

This is where trust and faith are imposed in IDs because the outsiders are clueless about the internal functioning of the company They, in their imaginary assumptions believe that operations are being conducted in an ethical and transparent manner. Strengthening the position of IDs can deter management from acting manipulatively. A qualified ID is well aware of his rights and responsibilities and will always act justly in the interests of shareholders. He understands that even if the ball is in the promoter’s court, refusal to resign will give him an opportunity to be heard where he can represent his story including the facts and defences to the shareholders. The shareholders will get some insight into the working style of the management which can further help them in decision-making best suited to their judgement. He can effectively neutralise the decision of controlling shareholders if he acts smartly. IDs are expected to step into the shoes of ‘monitoring roles’ seriously and not merely be a puppet of the executive directors. As they have no monetary interests in a company, they possess an attitude of having nothing to lose. However, they should not let go of these corporate malpractices as they are answerable to stakeholders and loss of trust by stakeholders in IDs will act most negatively on them. A qualified ID will accomplish his tasks in the most discreet manner and can save the company from a potential disaster.

History provides us with a lot of evidence on what a corporate governance failure looks like. The board which lacks independent oversight in a true sense is bound to be surrounded by misconducts in the near future which quite probably can lead to a company’s downfall and bring it to permanent disrepute.

You can now be a qualified and responsible independent director through our highly recognized Directors’ Institute - World Council of Directors.