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Independent Director Policy: The Need for Holistic Training Over Rigid Eligibility Criteria

The Existing Proficiency Self-Assessment Test: A Misguided Initiative?

The Ministry of Corporate Affairs (MCA) recently launched a proficiency self-assessment test for independent directors. This initiative aims to deepen their understanding of technical subjects such as securities, corporate law, and basic accounting principles. While this move may appear productive on the surface, it is unlikely to significantly enhance the quality and efficacy of boards in India.

Notably, the test seems to operate under the presumption that a stronger grasp of technical knowledge will lead to better decision-making. However, recent corporate failures suggest otherwise. High-profile cases like IL&FS and CG Power — both marked by significant corporate governance lapses — serve as stark reminders that it takes more than just technical know-how to guide a company effectively.

Independent Director Training

Unpacking the Recent Failures: A Lack of Fiduciary Responsibility?

In fact, these high-profile corporate debacles have brought to light the pressing need for directors to fully understand and execute their fiduciary responsibilities. Despite boasting well-established directors, these boards have failed in this crucial aspect of corporate governance. It's a troubling trend that extends beyond these failures and raises questions about governance practices even in well-established companies.

Whether it's shareholders voting against remuneration resolutions, whistleblower letters bypassing company protocols to reach the regulator directly, or related party transactions defeated centrally, these developments indicate a troubling disconnect. Clearly, there's a need to address these issues and improve trust in our corporate boards, but will the proficiency test help in this regard?

The Proficiency Test: An Overlap or a Solution?

The proficiency test seems to overlap with existing familiarization programs that are already being conducted by companies in line with the Companies Act 2013. These programs aim to provide continuing professional education to directors, keeping them updated on the latest in business and regulation. However, with the introduction of the proficiency test, there seems to be more focus on creating an eligibility criterion than on actual training.

The Challenge with a Hasty Decision and a Narrow Target Audience

The implementation of the proficiency test seems hasty and may invite difficulties. The timeline from the October 22 notification to the launch date of December 1 leaves less than two months for the panel to create and implement an online test. This could lead to delays or rushed execution, neither of which are desirable for an initiative of this magnitude.

Another concern is the limited scope of the target audience. The test is designed for independent directors with less than ten years of board or Key Management Personnel (KMP) experience. This excludes directors with less than ten years of aggregate work experience, many of whom are born into promoter families and do not classify as independent directors.

The Overarching Need for Focused and Holistic Training

While the proficiency test might add some value, its one-time nature and overlap with existing familiarization programs might limit its overall effectiveness. A more beneficial approach would be to develop continuous, in-depth training programs for independent directors.

Training: A Shift from Legal Compliance to Stakeholder-Centric Decision Making

Effective training should move beyond just ensuring compliance with the law. After all, companies have dedicated legal teams for that. Instead, training should focus on preparing directors to make decisions that best serve all stakeholders. This involves a delicate balance between what is legally right and what is the right decision for the company and its stakeholders.

The proficiency test, while helpful in assessing basic knowledge, may not provide the necessary training to navigate this complex terrain. The MCA would do well to rethink its approach. While the proficiency test may serve as a basic eligibility check, focusing on providing effective, continuous training to directors will likely have a far greater impact on board quality and, in turn, on corporate governance in India.

The Future of Independent Director Training

In the face of an evolving business landscape and increasingly complex corporate challenges, it's essential that our independent directors are not just technically proficient, but also capable of making balanced, strategic decisions. This is possible only through continuous, comprehensive, and holistic training.

After all, the role of an independent director goes beyond ticking the boxes – it involves ensuring a balance between compliance and decision-making in the best interest of all stakeholders. Let's equip them with the right tools to fulfill this critical role effectively.

Our Directors’ Institute- World Council of Directors can help you accelerate your board journey by training you on your roles and responsibilities to be carried out in an efficient manner helping you to make a significant contribution to the board and raise corporate governance standards within the organization.

Our ESG Expert certification will help you to amplify your understanding of corporate governance in a detailed manner paving the way for you to become a globally recognized ESG leader.

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