BSH NEWS
Corporate frauds that snowball into controversies, putting the company boards under the spotlight, have become more and more common. But while it might seem like being an independent director on a company board would be an unattractive proposition, with the danger of reputational damage, or coming under the watch of regulatory bodies, the reality on the ground is starkly different.
Boards are no longer struggling to appoint independent directors. Many independent directors are willing to join even if they are aware that the company has been engaged in fraud. The corporate spectrum has seen a jump in appointments of independent directors even as cases of financial statement fraud, bribery, corruption or technology related fraud are emerging as Covid has made companies increasingly rely on technology.
According to data provided by Prime Infobase, more independent directors have joined boards in 2021 at 1,150 compared to 1,018 in 2020. The data also shows fewer vacant seats and resignations of independent directors. Resignations fell from 995 to 778 and vacancies dropped from 309 seats 242 in 2021 for the same period.
“We have nearly 31,000 total directors on board. With over 300 courses for independent directors, we have trained at least 10,000 directors in the last 2 years,” said J S Ahluwalia, President, Institute of Directors.
ET Bureau
FRAUD: SO WHAT?
Around 63% of independent directors said they are willing to be a part of an organisation that has experienced fraud, which was not the case earlier, according to a recent Deloitte report.
The study said that independent directors are vigilant in terms of how the business is performing, exercise highest prudence in terms of providing oversight on the entire business operations, fraud risk management and ask relevant questions to the board.
“I see a ‘healthy tendency’ of independent directors joining organisations even if the company has experienced fraud which was not the case earlier,” says G Mahalingam, former whole-time director of SEBI and now an independent director on boards such as LIC.
“There is lesser apprehension as independent directors have also accepted that fraud cannot be eliminated completely, but one (IDs) can do enough to at least minimise the risk of fraud, at least from a magnitude standpoint,” says Mahalingam.
With the government of India mandating stricter parameters for hiring, potential independent directors have become more choosy in terms of the companies they want to join while exercising more ‘caution’, say experts.
The MCA had, in March 2020, issued a circular that if independent directors can prove that they were not aware of the fraud, then there are chances that they would not face prosecution.
So it’s not the fraud or the cybercrimes that is making independent directors edgy about joining boards. There are a lot of other issues like tougher regulatory guidelines and companies which are not transparent with information, and therefore, taking up a position of responsibility without having that support makes directors very edgy, in terms of joining new boards, said Jyotin Mehta, who serves on multiple company boards as an independent director.
TECH LEG-UP
Remote working has also enabled more frequent and detailed meetings which has helped independent directors in gathering more information of the company. It had its own challenges though, say independent directors.
“There is greater awareness as remote working (in many companies) has only increased the checks and balances we need to do. Our responsibilities have increased and no longer can we depend only on domain knowledge. We have to be aware of related party transactions, financial disclosures and be in constant touch with the company’s remuneration committee,” Mahalingam says.
More than 50% of IDs surveyed said, they are not as equipped as they should be, given the landscape, said the Deloitte report.
This also led to a lot of training of independent directors; training went up thanks to technology.
“It is very important to constantly update and equip ourselves with sectoral knowledge and peer group analysis to know what competitors are doing in the sector,” said Aruna Sharma, independent director on the boards of Welspun, Jindal Steel & Power and former secretary, Ministry of Steel.
Previously, it was an impossible task to bring everybody under one roof and train them. Now that everybody has got used to online meetings and online training, so more people are undergoing these sessions, says Sharma.
Besides, the mandatory requirement to clear exams within a year of joining as an independent director, also saw many IDs training and preparing themselves to take exams.