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‘Laws can drive good governance, only up to a point’

A veteran lawyer and independent director on numerous Boards, Vijaya Sampath measures her words carefully. An interview on how the governance landscape has changed.

February 26, 2020 / 06:21 PM IST

A lawyer by profession, Vijaya Sampath also wears the hat of the ombudsperson at Bharti Enterprises. She is also a member of the Board of Directors of eight companies that include Ingersoll Rand, Intellect Design Arena, Varroc Engineering and Safari Industries. She is also a Board member for three subsidiaries of L&T in the power sector, two of which are joint ventures with Japanese Mitsubishi group companies.

Sampath who believes she is valued as an independent director for speaking her mind, is also the Chair of the Audit Committee of the Board at Erin Lifesciences.

In a chat with Shalini S Dagar, Sampath shares some of the changes that she has observed through the years in the role of the independent director.

Edited excerpts:

Q:  In your experience, how has the functioning of the boards and the role of the independent directors changed in the last few years?


A: Independent directors have become very, very watchful about their role, their responsibility and their accountability. Though rights are on one side and duties on the other, the duties far outweigh the rights (now).

There is a lot of questioning that goes on today that was not there earlier. In the last three years, there has been such a sea of change in the manner in which board meetings are conducted, the way information is presented to the board, the way management is questioned by the board, the length, agenda, quality and quantity of board meetings.

Q: What has been the trigger for this change? Was it the Companies Act, 2013?

A: This was part of the trigger, but there are other factors also. Earlier, nobody understood what independent directors had to do, but now the Act as a beginning has put so much of responsibility on the Independent Directors. Either you should know directly that you are responsible, or you "ought to have known through the board processes". That is as wide a definition that can be given.

That means even if you are not physically present at the board meeting, once you get the board minutes, whether you agree or you don't agree, you have to say what you want to say. You ought to have known.

Further, the Schedule specifies the duties of independent directors. Apart from signing the balance sheet and audited accounts, it also includes internal financial controls and certifying at the end of the year that the company is in compliance with all laws. That is a very wide thing to state.

There is a business responsibility statement that the directors have to sign. All these have evolved over time, either by the by the Companies Act or by the listing and disclosure obligations of SEBI.

If you look at the liabilities and responsibilities, naturally the position has evolved. And I have seen it evolve over the last many years.

Q: Is the risk worth it as an independent director?

A: That is something you always evaluate. The Supreme Court, (all learned lordships of course), has in some cases frozen the assets of the independent directors even before the guilt is proven.

I can understand that once proven guilty of fraud, the personal assets (of independent directors) can be charged. The Supreme Court has gone far beyond what the Act has prescribed also. The law itself is very stringent and very onerous.

All the time, you have to keep watching your back.

Q: How much of due care and diligence can you undertake?

A: A tough question. Before joining a board, you need to do whatever due diligence is required. If you see the issues that boards are facing today, there are of different types.

One of the duties of the directors that I find very difficult to understand is about, "acting in the interest of all stakeholders, environment and community." This is a duty written in the law. And I keep wondering how will anybody do that?

Each stakeholder has a different objective when it comes to the board. Employees are looking for long term employment -- good company to work, suppliers are looking for fair wages, consumers are looking for good quality goods at a fair price, short term investors are looking for uptick in capital price, long term strategic investors are looking for long term value. And there are other stakeholders.

And there is a conflict in each one. It is not possible to safeguard the interests of everybody. If the law said "balance" the interests of all stakeholders and conflicts, I can understand that. That is the role the board should be playing.

It is becoming more and more difficult every day.

Q: So how do you pick a board?

A: There are few things that you should see. One is financials for the company for the last three to four years. Look at the sector the company is in, its litigation, and the promoters. That is the key. What is their track record? How are they regarded? Have they ever been in trouble? Who are the other board members? Would you like to be on the board with them? Look at these factors. Spend enough time. And ask questions, when you go and meet the directors.

For me it has always been like that. I never knew the promoters or the directors. I decided to join because I found the financials to be good, I liked the promoters and the directors.

I have made mistakes too. and I have got out of companies too. At least there should be no red flags.

Q: What are red flags in your book?

A: What is the debt equity ratio, and the return on capital employed? Have they over-leveraged themselves? Has there been any issue with regard to their product or service in the marketplace? Has the promoter ever been arraigned for wrongdoing? Has SEBI ever issued a show cause notice against them for anything? Has it been settled, resolved or continuing? How do the financials look? Have they paid their interest on time?

So there are 10-12 parameters -- both financial and non-financial -- and you check against each of them.

Q: Why is  it so difficult for companies to separate the Chairman and Managing Director roles?

A: It is difficult. The Companies Act has not provided for it. It is SEBI which seeks this as a best practice. Most Indian companies are promoter-driven where the promoter is usually the CMD and over a period of time, grooms his son or daughter to take over from him.

This is quite natural if you hold a majority of shares in the company. To say that the two positions of Chairman and MD should not be related or should be non-executive ... (shrugs)

A non-executive chairman like an independent director cannot really have the complete grasp of what is happening in the company. And a Chairman needs to be at the helm of affairs with a full understanding of the company all the time, every time.

Q: So the concept per se is flawed in terms of something that delivers good governance?

A: It is flawed. It doesn't make sense. I also think this will not improve corporate governance. A part-time chairman doesn't really work in most cases. In some companies perhaps it may. I am not saying that there is only a way to do this, but it should be left to the company and the shareholders to decide.

Q: Some of these things are now being set in stone in a way... Can you then legislate your way to good governance?

A: You can. You can drive governance up to a point. Beyond that it is up to each company and each person. You have to have rules, otherwise it will be a free-for-all. Basic rules are very important. Strict rules of governance about preventing conflict of interest and insider trading are very important. Don't be so prescriptive as to shackle a company so much that it is not able to function effectively.
Shalini Dagar
Tags: #CFO Diary
first published: Feb 25, 2020 10:56 pm
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