In Indian corporate history, boardroom battles are truly old hat. What makes the Mistry-Tata spat so singular is that finally, for the first time since we legislated the new Company law in 2013, India will get to find out if the role of independent directors in corporate governance is quite what the pre-legislation rhetoric projected it would be. Judgement day is here.
To set the context, let us understand where the law stood before 2013. Since 1956, we applied a company law designed to help our political-industrial complex run on a uniquely Indian model of crony capitalism. Boards of Indian companies revelled in credible deniability. No individual director had either power or responsibility. Executive power was exercised in the collective wisdom of the Board. An individual director could claim that the company, not he, was the owner of any scam and proof of conspiracy being as hard as it was, prosecutions were unknown.
In 2001, SEBI made a weak attempt to introduce a stricter norm of fiduciary responsibility by introducing Clause 49 of the Listing Agreement. This defined independent directors as people who had no “other material pecuniary relationship” with the company which “in the judgment of the Board may affect independence of judgment of the directors”.
This could not work, and it didn’t. When conflict of interest becomes a matter of opinion, you can be sure the law isn’t worth much, and it wasn’t. As if that wasn’t enough, Clause 49 also let directors off the hook except in circumstances where an “offence has been committed by the connivance or is attributable to any gross negligence of the officer” (Sec 21 SCR Act).
Other than the Audit Committee, independent directors really had no role at all. Like I said in my book Bullshit Quotient, independent directors remained nothing but celebrity endorsements on company boards, like Shah Rukh Khan sitting in a tub full of role petals enticing you to buy shares of the company, rather than Lux soap!
The new company law of 2013 finally changed all that. Section 149 now sets out a comprehensive definition of who is qualified to be an independent director, and it’s a hard hill to climb. It steers independent directors into a seriously heavyweight Schedule IV, which creates a whole new role for them.
Speaking compositely, the new law does four things. First, it identifies independent directors as GRC drivers. The upshot of this is that the man who sits on the outside with no money in the company carries the moral burden of the company. Second, it enjoins independent directors to become protectors of minority shareholders, a sort of stake-less David taking on the might of the successful entrepreneur.
Third, it asks independent directors to have an independent voice expected to “scrutinise the performance of management in meeting agreed goals and…monitor the reporting of performance”. Finally, it expects independent directors to hold separate meetings in the absence of both management and promoter nominee directors, and review the performance of the rest of the Board. By definition, you could say that the law demands that every independent directors be hostile to the promoter!
This enlarged role also comes with grave risk. Sec 149 provides that “Independent Director shall be…liable only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or connivance or where he had not acted diligently.” (Emphasis Supplied). So what does “acted diligently” mean for an independent directors? That is explained in Schedule IV.
Schedule IV, Part 1, Guidelines of Professional Conduct Clause 1 requires Independent Directors to “uphold ethical standards of integrity and probity”.
Clause 9 of the same part expects them to “assist the company in implementing the best corporate governance practices”. Schedule IV, Part II, Role and Functions, Clause 4 expects them to “satisfy themselves on the integrity of financial information”.
This responsibility comes riding on the back of Sec 23M of the Securities Contracts Regulation Act, which sends an independent director to 10 years in jail with Rs 25 crore in penalties for failing in his duties. I think we can fairly agree that independent directors carry a heavy burden in this new dispensation, and it would behove them to discharge this responsibility with great seriousness.
Clearly, independent directors of Tata Group companies are aware that the cheese has moved. We must not forget that Indian Hotels, Tata Motors, Tata Chemicals, Tata Consultancy Services and Tata Steel are all listed companies.
As the ripples created by Cyrus Mistry’s removal from Tata Sons spread downstream, it forced independent directors of these companies to reconcile possible conflicts of interest between their fiduciary responsibilities and their personal relationships with the Tatas. This has played out in full glare of the media. Let’s take some examples.
As far back as November 4, independent directors came out in support of Mistry. The Tatas reacted by claiming that Mistry was trying to deviously take over Indian Hotels amongst others with the support of independent directors. On November 10, the independent directors of Tata Chemicals came out in full support of Mistry because they believed he had done a good job. The company reacted by calling an EGM for December 23rd to remove Mistry and independent director Nusli Wadia from the Board.
Wadia has reacted by issuing notice claiming defamation. On November 12, three of six independent directors of Tata Steel came out in support of Mistry. The Tatas reacted by claiming Wadia was galvanising other independent directors to act against the Tatas. The company has called an EGM on December 21st to remove Mistry and Wadia from this Board as well.
As you can expect, Wadia has issued another defamation notice. Similarly, Tata Motors has called an EGM on December 22 to remove Mistry and Wadia as directors. Wadia has issued yet another defamation notice here as well.
This is where we encounter a great irony playing out in the corridors of India’s most respected companies. The law wants all independent directors to act in accordance with their fiduciary duties and protect the best interest of the company as they see fit in their individual judgement. Yet, when they do so, the majority shareholder makes all manner of alarming claims including but not being limited to an attempt to influence other independent directors, an attempt to take over the company in a hostile manner and so forth.
I am not saying that these independent directors do not actually harbour such motives. I am not here issuing character certificates, nor is it appropriate for me to do so. Be that as it may, it does strike me as rather obvious that all things considered, some independent directors are taking heat here for doing a job the law wants them to do.
Worse, now that some independent directors have exercised their independence and taken an independent line of action, one of India’s most respected business houses has decided that such independence of judgement is simply unacceptable and has moved to have them ejected from the boards. Where does that leave our new corporate governance norms?