Independent Directors: Pecuniary Relationships
Are they really harmless?
HIGHLIGHTS OF THE REPORT
The Companies Act, 2013 & Clause 49 have set monetary limits (Rs. 50 Lakh, 10% of revenue of the legal firm, etc.) for such relationships between Companies and their IDs, breaching which IDs can no more be classified as ‘independent’.
Howard M. Schilit and Jeremy Perler, in their book “Financial Shenanigans: How to detect accounting gimmicks & fraud in financial reports”, highlight such pecuniary relationships as a red flag that provides a breeding ground for shenanigans by companies.
Pecuniary relationships question the true independence of IDs as the legal/ consulting firm draw a fee from the company and work for the company and/or promoters.
The legal/ consulting firm no longer acts as an independent party and hence the advice given by them can be questioned as the ID (being a partner in the firm) may influence the advice.
Often these IDs sit on the Audit Committee or even Chair it. This raises questions on the independence of the most important committee of the Board which safeguards minority shareholders’ interest.
Companies often don’t disclose the fees paid to these legal/consulting firms and just state that it is not “material”.