Compliance blues spark exodus of independent directors

Independent directors seem to be quitting in droves. More than 982 have resigned since January last year, according to Prime Database, with the last two months seeing more than 150 exits. With the compliance burden on them increasing in the wake of recent rulings and regulatory scrutiny being ratcheted up, more independent directors are likely to depart, shrinking the talent pool further, experts said.

This is a concern not just for independent directors, but also for the companies, as potential independent directors are becoming more selective and cautious,” said Ketan Dalal, managing partner at Katalyst Advisors.

One former top executive at a multinational firm, who had looked forward to post-retirement employment as an independent director, has decided to stay on for now. But he’s taking precautions. Currently independent director on three boards, he’s trying to insulate his assets by forming a family trust.

Wary about the increasing prospect of being made liable for any wrongdoing by the companies they are associated with, independent directors are trying to ringfence property and other assets by setting up such trusts.

“Lately we have seen that many individuals including directors of companies and those looking to take up new roles are setting aside a portion of their assets in an asset-protection trust to insulate their personal wealth,” said Anuradha Shah, managing director at estate planning firm Warmond Trustees.

Some legal experts said this may not always be feasible as it would mean losing absolute control over assets. Recent court rulings and stronger regulatory oversight by the market, banking and insurance watchdogs have stepped up the scrutiny on boards and increased the liability of directors.

Besides this, a committee on corporate governance formed by the Securities and Exchange Board of India (Sebi) in June 2017 under the chairmanship of Uday Kotak has recommended several changes in regulations to improve the standards of corporate governance at listed companies. This would add to the compliance burden on independent directors if implemented.

Among recent rulings on responsibilities of board members was a recent Supreme Court decision that restrained independent directors of Jaiprakash Associates from transferring personal assets over insolvency proceedings of a group company. That spooked several independent directors, experts said.

Boards are being pulled up in most instances where loans have turned into non-performing assets (NPAs), many of them companies in the infrastructure and core sectors. In the past two years, several independent directors have resigned from debt-laden companies and those that have been unable to make repayments on time.

“The responsibilities of independent directors have become quite onerous and penalties very severe, while the company information available to independent directors is rather limited,” said Arun Duggal, chairman, ICRA. “They have to rely on the promoters, management, and the auditors to keep them informed for deciding on various board matters.”

Duggal said it will be difficult to attract high-calibre professionals to serve as independent directors. “The legal and regulatory framework and recent court judgements have thus achieved exactly opposite of what is in the best interest of the shareholders, particularly minority shareholders,” he said.

However, InGovern Research Services managing director Shriram Subramanian, said independent directors should take their roles much more seriously.

“They should not be subservient to promoters and should have a mind of their own and assert their independent mind,” he said. “Continued association with a company and not preventing suspicious transactions cannot be let go.”

Link: Economic Times- December 29, 2017