Corporate Governance: Maintaining Corporate Integrity: Evolving Independent Director Responsibilities
The idea behind appointing independent directors (IDs) is to introduce important balance into the decision-making process within a company. Central to this concept is the idea that ID brings unbiased views and a commitment to ethical standards. Moreover, it is essential that IDs are not simply passive participants in board discussions, but active contributors who ensure their voices are respected and heard. This requires a culture where IDs feel empowered to express their views, raise concerns, and clearly articulate expectations for governance, transparency, and ethical behavior. The amendments now require independent directors to explicitly state in their letter the reasons for their resignation.
The basis for this amendment was to resolve the issue of outside directors resigning for reasons such as ‘personal commitments’, raising doubts and concerns about compliance. Destroying IDs without a clear reason leaves regulators guessing the same reason. The watchdog has now forced independent directors to state their reasons for resigning, shedding light on an important issue.
In the past, market watchdogs have taken shots at outside directors, ranging from financial sanctions to capital market bans for failing to conduct due diligence. Some of the prominent names include Jai Mata Glass Limited, Securekloud Technologies Limited, and Sanwaria Consumers Limited.
IDs now have an obligation to look deeper into the underlying issues that trigger departures, rather than providing general reasons. By highlighting specific concerns, such as non-compliance with regulatory requirements, questionable transactions, inadequate disclosures or governance missteps, independent directors are shining a light on issues that may have previously been overlooked or ignored.
This evolving landscape of prescribing the reasons contained in an independent director’s resignation letter has become more thorough than ever before and is conducive to scrutiny, investigation and investigation by regulators. At the same time, these letters serve as an important defense mechanism for ID, providing a comprehensive explanation of the reasons for departure and insisting that these reasons are thorough. In the event of an investigation or inquiry, these letters act as a shield, providing immunity to ID by transparently documenting the basis. These protected IDs, which meticulously explain the reasons, are exempt from liability. A notable result of this amendment is the active role played by independent directors in protecting shareholder interests and maintaining corporate integrity. Recent cases, including the Zee case, have cited concerns such as unfair insider trading (RPT), ambiguous valuations or lack of satisfactory response from management when independent directors resign, leading to SEBI taking the following steps: It shows an example of what prompted you to do so. We begin an investigation that will eventually uncover the case. Another classic example is PTC Financial Services Ltd, where an independent director resigned citing corporate governance failures. The impact of these regulatory interventions has been overwhelmingly positive. This has not only promoted timely regulatory intervention to protect the interests of shareholders, but also instilled confidence in the effectiveness of corporate governance mechanisms.
In saying this, I think it is a test of ID’s wisdom when to rely on trust and when to dig deeper to investigate and decide further action accordingly and submit a detailed resignation if necessary.
The importance of this rule change extends beyond simple compliance with procedures. This means an active paradigm shift. We created a culture of accountability and integrity within our boards by requiring disclosure of specific reasons for resignations and encouraging escalation of governance issues to regulators.
In another notable step towards strengthening corporate governance, independent directors are now required to provide a comprehensive account of their history of resignations from the board within the past three years. This requirement emphasizes the thorough scrutiny surrounding ID appointments and highlights the profound responsibilities and accountability associated with such roles. Resignations can no longer be prudently exercised without repercussions. Instead, IDs should meticulously consider their suitability for board positions, fully aware that their past resignations will be subject to scrutiny. This guidance serves to clearly indicate that IDs must approach their positions with the utmost seriousness and sincerity, recognizing the significant impact their decisions have on organizational governance and integrity.
The amendments mandating clear disclosure of resignations by independent directors are an important milestone in strengthening corporate governance practices in India. This highlights the important role of independent directors in managing corporate integrity and ensures that governance issues are addressed promptly, ultimately promoting investor confidence and market integrity.
(The author is the founder of MMJC and Associates, a corporate compliance firm based in Mumbai.)
