A major theme in corporate governance that has emerged worldwide is the institution of independent directors (IDs).
This article deals with the roadmap for its institution.
Why was this institution created?
The institution of IDs was created to prevent the growing incidence of promoters or management who enrich themselves at the expense of the minority shareholders.
Therefore, if IDs were to perform their role, they were to be independent of the promoters.
What is the problem in India?
The key problem in India has been who gets appointed as an ID.
The regulations specify who cannot be an ID, but they don’t speak about the qualifications or experience of the IDs.
The field is wide open to the appointment of anyone - friends, relatives (not covered by definition), neighbours, etc.
IDs are appointed and paid by the very person whose excesses they are supposed to guard against.
Most companies have misused the requirement of women directors or performance evaluation of directors.
But, there is no solution if our expectations from IDs continue to be misplaced.
What is needed?
There is a need in the change of mindset so that the focus can shift to the perpetrators of fraud. Not the IDs, who are bystanders.
Multi-pronged and harsh measures are the only ways to improve corporate governance.
The following are some suggestions that deserve serious consideration.
What are some suggestions?
Individuals commit frauds; companies are only vehicles.
So, individuals, not companies, should be punished for fraud/non-compliance.
Severe punishments for malpractices are the best deterrents and inducers of governance.
Comprehensive databases need to build for each company of all promoters, directors and key management persons (KMPs).
These databases should be interlinked, along with databasing all their relatives.
There is a need to enhance surveillance and software-driven Early Warning Systems in the context of both the companies and individuals.
The investigation function needs to be better skilled.
Separate securities-market courts should be established, dedicated to faster pronouncements; cases cannot linger on for years.
But, it would also be politically controversial to abandon the IDs institution, as it is now a universally adopted concept.
