MUMBAI: The number of independent directors who resigned from board positions doubled in 2019, compared with total exits in the previous two years, as greater liability, rising number of corporate governance cases, increasing fear of fraud risk and chances of personal reputation being at stake led to the exodus.
A record 1,393 independent director posts were vacated this year, compared with 767 in 2018 and 717 in 2017, according to data from market tracker nseinfobase.com, run by Prime Database.
Over 550 directors exited citing unspecified “pre-occupation,” personal reasons or without citing any reason.
Other reasons for exit included change in management, conflict of interest, and investigation by regulatory bodies. Close to 120 board members said they are “not interested in reappointment.” Over 400 exits were due to retirement, superannuation or term expiry, the data showed.
Board members and legal experts said independent directors are ready to quit their board positions at the slightest of red flags these days.
“With all the additional risks associated with an independent director’s position, many may have decided to step down,” said Arun Duggal, chairman of credit rating agency ICRA and an experienced independent director.
“There are also a lot of companies that have got into financial stress and independent directors may not have wanted to continue.”
“With increasing corporate governance issues over the last few months, independent directors are uncomfortable being on the boards of companies with unclear operational practices,” said Pranav Haldea, managing director, Prime Database.
Looking before the leap Increasingly, independent directors are approaching legal experts before taking up a board position, or seeking their advice before exiting.
“We have faced similar scenarios. Liability of directors have increased manifold and processes are becoming more onerous,” said Anshul Prakash, partner, Khaitan & Co and a specialist in employment and labour law. “Personal credibility is at stake and reputation is getting caught up in the midst of controversy, where the independent director may not be able to demonstrate his/her position effectively.
Independent directors feel better to move out at the slightest of doubt,” he said. Prakash, who has advised directors on their exits, said people sometimes face a dilemma; their views are not completely honoured but if something transpires later, the entire board — including independent directors — are held responsible as per law. “Independent directors feel a degree of alienation due to gap in communication,” he added.
That apart, proxy advisory firms (which advise institutional investors and companies on issues pertaining to corporate governance) do not concur with the Sebi rule of having two five-year terms for independent directors – base year for which would be 2014 (when the rule became effective). They are in favour of a 10-year-term, but are wary of it being considered from 2014. Instead, proxy advisory firms recommend the tenure be counted from date of first appointment.
“We recommend voting against directors who are more than 10 years from first appointment,” said Shriram Subramanian, managing director of proxy advisory firm Ingovern.
Also, the firms recommend a smaller number of directorship positions a person can hold at a time. Sebi allows an individual to be on boards of seven companies. “Seven is a high number for a director to contribute and give quality time to the board meeting,” said Subramanian.
Another concern among independent directors is the companies’ reluctance to sign up for Directors and Officers Liability Insurance that protects directors from many liabilities.
Increasing fear of fraud and being held liable for things that independent directors may not be privy to, is also resulting in exits, experts said. To make things tougher in an already dwindling pool of independent directors, the ministry of corporate affairs has recently announced tests for independent director appointments, where 60% marks will be mandatory criteria for qualification.
“The MCI is not making it easy either. Already independent directors don’t want to take the higher liabilities and fraud risk in many companies is pushing them away. Neither is the compensation commensurate with the risk associated. Now this requirement to get 60% marks in the test will even make it tougher to attract people to boards,” said Subramanian.
Source: Economic Times