Scams and Role of Independent Directors

On 15^th of February 2018, a shocking story of scam of Rs. 11300 crores broke out and our entire nation and national media lapped it up.

For Indian media which loves sensationalism it was a God sent opportunity and they gobbled it up. A scamster embezzled the banking system and siphoned off Rs. 11300 crores. Entire banking system of the country was shell shocked as to how a fraud of such magnitude could actually go undetected. But this was not one off incident or had happened for the first time. It also provided fodder to the Government and the opposition to train their guns at each other to score some brownie points. We painstakingly listened to all the garbage which was dished out to garner more TRPs and to show supremacy of one media channel over other. But unfortunately as has happened in most of the other cases nothing has been learned from the past nor efforts have been made to learn from this case.

There have been umpteen discussions to find out under whose regime these fraudulent transactions were made and what was the amount of transaction made under each regime but all this is an exercise in vanity. It has been an open secret that businessmen connive with politicians to get loans approved from Public sector entities, make huge profits and run away with the bounty in foreign land making public sector and Indian tax payer bleed.

I have meticulously analyzed some of the frauds which have taken place over the years and there is one common thread which binds all these frauds is the inability of independent directors to detect the frauds and have their say in the way things were allowed to go uncontrollably under the garb of promoting business interests. Even in case of Satyam fraud role of independent directors was under scrutiny.

It is really ironic that independent directors who are appointed as watch dogs to keep a tab on working of the company and protect shareholder’s interest have actually excacerbated the issue. Their responsibility is restricted to signing the minutes of meeting and they have no accountability for such frauds.

Unfortunately none of the discussions in either print or electronic media have dealt with this issue but it is one of the most critical issues as it could really help detecting the fraud.

Independent directors are chosen to safe guard the interest of the organization and they have to be experts in their field. Some of the measures which can be adopted especially in the functioning of boards are as follows:

1. Independent directors so chosen should be experts in their field and should be involved in policy making for that particular department say for an oil company, there should be an independent director refineries, who should have core competency in refining and must be involved in decision making above certain value. Designation should also be more specific as in Independent Director – Refinery, independent Director, finance and not just the usual Independent Director.

2. An independent director should be on board of at least three companies in the same sector so that they can track the transactions and detect the fraud if any is taking place under the garb of business decisions. In the case of PNB had the same independent director been there on the boards of three banks it would not have been difficult for him to detect the big transactions which were taking place between banks. As of now independent director on board of one company is not aware of what is happening in another company. It is becomes even more important if the organizations transact with each other regularly.

3. Board of Independent Directors: Independent directors are busy or at the best follow with the opinion of other functional directors i.e. where the need for a board of independent directors comes in. Independent directors of the organizations with in same sector should meet at least once in a financial year to analyze the industry trend and all big ticket transactions i.e. above Rs. 100 crores should be discussed threadbare more so in the case of public sector undertakings which take pride in transparency and ethics.

4. Employee Director: Even though human resource is the most important resource for any company but there is no representation of human resource in board meetings which happen in hush hush manner behind closed doors where concern of employees is not paid heed to. It is employees of the organization who have to actually implement the decisions taken by the board. This step will go a long ways in assuaging the fears of employees in board meetings . It is of paramount importance to have one employee director in all board meetings who will represent the concern of the employees in board meetings.

5. Compensation to Independent Directors: The kind of responsibilities independent directors are expected to discharge in no ways commensurate with the kind of compensation they get. In Some of the annual reports which I have gone thru the kind of compensation which is paid to independent directors is peanuts compared to what functional directors make.

Above mentioned are some of the issues to dwell upon as most of the discussion which was happening was beating around the bush without actually getting into the core of this vexed issue. In some part of the world people like Nirav Modi and Vijay Mallaya must be resting in glory thinking how easily they hoodwinked the entire system and fled with their loot never to be caught by law. It is really deplorable to see the brazenness with which these scamsters loot the entire system and run away with the bounty.

Independent directors are on the board to safeguard the interest of shareholders and they have a vital role to play. If some of these suggestions are implemented it shall go a long way in preventing another Nirav Modi like saga.

Disclaimer: Views expressed by the author are personal.

Images from google images.