The government had been under pressure from vested interest groups, including top public sector bankers, heads of financial institutions, bureaucrats and influential professional directors such as chartered accountants and solicitors, to let go part-time company directors of the accountability for management mistakes, omissions and commissions, executive mischief and deliberate misguidance in financial matters which they are supposed to oversee and correct as board members.

The latest government decision to save the back of independent directors in criminal liability cases against companies serves the biggest blow to the proposed companies act which is supposed to provide top priority to corporate governance by making the board of directors more broad-based and members more accountable to stakeholders. It dilutes the basic concept of having independent directors on the board of public companies. Independent directors are supposed to play a very important role in the affairs of corporate management at the board level. They operate through various committees such as appointment committee, remuneration committee and audit committee. The appointment of CEO, other executive directors, fixation of their remuneration, board level promotion of executives, evaluation of new projects and interaction with the company’s statutory or external auditors to ensure financial transparency and fairness of financial reporting and statement are among the key functions of independent directors.

In many countries, the executive management committee, headed by chief executive officer (CEO), reports to a separate apex-level board, which is also known as supervisory board, comprising almost entirely by part-time independent directors. The CEO generally functions as the chairman of the apex corporate board. Such a person is designated as the chairman and CEO or chairman-cum-managing director. These independent directors are entitled to attractive fees and perks for rendering valuable professional service. They are accountable to shareholders. And, as such, they can demand information from the committee of executive directors whenever required. They can’t dump their primary responsibility of ensuring good corporate governance and can’t avoid legal prosecution in the event of governance failure.

However, the government refuses to learn from the experience and practices followed in more advanced countries even after the 2G spectrum allocation scam, which involved several public companies, local as well as global, in financial wrong doing and misrepresenting their holding pattern. The latest government circular in this regard says in case of maintenance of accounts and balance sheet, specific instructions have been given to ensure that the mantle of complying with provisions of the Companies Act falls only on the managing director or the CEO and the managers, meaning the whole-time directors, and the company secretary in a prosecution case. The new government directive will cover even the pending cases against companies allegedly involved in financial fraud and malpractices. This may mean, for instance, the non-executive directors, including family members of Tamil Nadu chief minister M Karunanidhi, in Kalaignar TV, will not come under the scanner of the corporate affairs department or the government’s serious frauds office.

What is more, a special safeguard has been provided for public sector companies. The legal safeguard in the form of a prior government sanction is made mandatory to prosecute directors, officers, parliamentarians and legislators. This is rather unthinkable, especially in view of the historical nexus existing between the PSU management and departmental ministers as well as certain legislators. Mega PSUs are in mega projects, involving investments of thousands of crores of rupees and requiring clearances from public investment board (PIB) and the cabinet committee on economic affairs (CCEA). In the past, there have been many CBI investigations into alleged kick-backs in public sector contracts and purchase deals. The mandatory safeguard clause in the companies act could be grossly misused to protect the back of nominee directors, government officials and departmental ministers in such cases.

These provisions in the companies act are sending wrong signals with regard to the government’s so-called intention to tighten the noose of corporate management by ensuring greater role of independent and nominee directors in a company and making their appointment compulsory even in unlisted companies. The laudable intent will become meaningless because of the inclusion of the protective clauses to keep these directors outside the ambit of prosecution. They can always plead ignorance of any wrong-doing by a company, the board-room of which they decorate as distinguished members to protect the interest of all stakeholders, and get away without sharing any responsibility of fraud. This will dilute the very essence of corporate governance.

This may also encourage many ‘innovative’ family managed business corporations convert themselves into 100 per cent board-managed companies, where all directors serve as independent and nominee directors. A chief executive of such a company is generally designated as ‘president’, who presides over the executive management committee and reports to the supervisory board. In the 1970s and the early ‘80s, many companies – Indian and multi-national — turned board managed, fully or partly, to circumvent the restrictions on managerial remuneration under the companies act to adequately compensate their professional executives. A ‘manager’ under the act means a whole-time corporate board member. His or her remuneration package was restricted to only Rs. 11,000 per month, comprising up to Rs. 5,000 in salary and Rs. 6,000 in perks. Many Birla companies were fully board managed. A well-known industrial promoter used to boast in public that he chose to stay away from the ‘legal’ management team to avoid prosecution by the ‘vindictive’ state investigative machinery of an ‘unfriendly’ union government in New Delhi.

If the new companies bill incorporates these provisions, which it will, in all probability, in view of the latest decisions of the ministry of corporate affairs just ahead of placing the document in Parliament to promulgate a fresh companies act, may make a farce of the accountability of the corporate board and the government’s resolve to battle and end corruption. It is now for parliamentarians to carefully revise the provisions of the bill, debate strongly against any move to dilute the corporate accountability aspect to sub-serve the agenda of those vested interests in both the government and outside to encourage the present government-business nexus to perpetuate corruption. In fact, it may be a good idea if our parliamentarians take a leaf out of the recently enacted Dodd-Frank Act of the United States in this regard and take a strong uncompromising stance on issues such as corporate accountability and financial transparency. (IPA Service)