The Serious Fraud Investigation Office (SFIO) appears to have given a clean chit to Satyam’s independent directors, as it was found that the board was not involved in the fraudulent conduct and that they were kept in the dark. Much has already been written about the difficulties of placing too much reliance on the role of independent directors in corporate governance. Independent directors spend only a few days in a year on affairs of the company, and they are indeed busy individuals carrying out their regular business and professional activities unrelated to the companies on whose boards they serve. Even where independent directors are generous with their time and effort, their advise and decision-making is based on information provided by the management (or promoters) of the company, who can control the amount, quality and structure of information that reaches the board. It has been said that “power over information flow is virtually equivalent to power over decision”. It is unsurprising then that the independent directors of Satyam were neither aware of the goings on in the company nor were they in any position to prevent it.
An outcome of the Satyam episode is that it seems to have instilled fear in the minds of independent directors in
Singapore Exchange Ltd (SGX) will be launching a new announcement template on SGXNET for notice of resignation of directors and key officers with effect from 1 October 2007. This will be applicable to all listed companies in
One of the findings of the study highlighted the importance of listed companies providing detailed information on the resignations of their directors and key officers to investors and the marketplace. The new easy-to-use announcement template will facilitate listed companies disclosing in detail the reasons for the resignations. The resignation of one director or a succession of them, particularly of independent directors, may indicate something untoward in terms of corporate governance or commercial developments. Investors should be made aware of these changes.
This is not to suggest that there is something untoward in every Indian company where independent directors have resigned in the past. That would be too rash a conclusion to draw. It could also be the fear of potential liability. Independent directors are often fearful about this issue (and understandably so) for two reasons: (i) they are not involved in the day-to-day activities of the company although they may bear some responsibility for the actions of management; and (ii) there are myriad directions from which liability could strike since directors are responsible (subject to exceptions) for violation of various statutes by companies, particularly for the so-called socio-economic offences. There is “fear of the unknown” on both these counts.
Having said that, the past track-record of directors being held liable for actions of the company favours independent directors. In an influential series of studies carried out across several countries (though not including India), it was found that the risk of liability on independent directors is far lower than what commentators and directors themselves believe. Even in a litigious society such as the
Although the studies above are generally optimistic, it can be even starker issue in the Indian context where the litigation process tends to be prolonged and cumbersome, and a closure on the issue being unlikely within a short time frame. Further, the number of socio-economic legislation in