As this created an environment of uncertainty

As an aftermath of the Satyam scam, there was a
widespread resignation of Independent Directors throughout the country. The
imposition of severe liability on the Independent Directors from Nagarjuna
Finance ltd. due to their lack of diligence exercised in uncovering the scam was
eye opening to many. In this paper, the authors present the findings of their studies
to ascertain what the role played by Independent Directors in companies really
was.

All of the independent directors regarded themselves
as advisors to the promoters and management, above all. While several directors
hinted at the growing need to be on the lookout, the general consensus was that
independent directors are not there to prevent management from taking decisions.
It was unanimously admitted that the liability imposed upon independent
directors for their failure to act as watchdogs for potential wrongdoings was a
bit much. Given that there is tremendous scope for reputational damage and the probable
liability imposed upon them being undefined, independent directors were sceptical
of what their duties entailed on a day to day basis. Moreover, this created an
environment of uncertainty as to how an independent director was to actually go
about fulfilling the duties expected from him.

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

The encouraging finding of the study was that the
Board was generally receptive of the ideas put forth by the independent
directors and the promoters also genuinely valued their input. In fact, their
ideas were acted upon and incorporated in some cases by the promoters. In cases
of divergence in opinion between the independent directors and the promoters, the
opinion of the latter eventually prevailed by virtue of their significant
shareholding pattern, but the ideas of the independent directors were generally
respected.

With regards to their liability, it was felt that
independent directors need to be able to rely on the information provided by
auditors and management.1 With no legal protection
for relying on specific information provided by the company, Directors would
not be comfortable serving as watchdogs.

On a general reflection of the observations made in
the paper, the author of this research paper believes that there is indeed some
truth behind the findings of the paper being discussed. For starters, Schedule
IV of the Companies Act lays down the roles, duties, and conduct to be followed
by the Independent Directors. The guidelines are however far too broad in
nature for an Independent Director to understand how he must perform his functions.  As discussed in section of this paper, the
duties merely require a director to update himself of the happenings in the
company, and strive to attend all the
board meetings, amongst others. These provisions are far from binding in
nature, and a clear reading of his role brings us to the understanding that his
objectivity and neutrality is sought after, more than anything else.

Although the Companies Act was enacted four years after
the Satyam scandal, the mechanism of independent directors still continues to
be far from strengthened. Independent Directors should in no event be given
broad duties and be expected to fulfil them with diligence. The problem
therefore lies in the independent directors being reassured of their status and
the implications of their actions or non-actions within the company. Furthermore,
the authors of the paper being discussed also observed that the current levels
of compensation to the independent directors were far from proportionate to the
duties expected from them and the levels of liability that they could incur. The
mass resignations of Independent Directors in 2009 therefore comes as no
surprise.

The Companies Act,
2013, does not improve the position by a significant amount. The roles of
independent directors still require a greater amount of clarity as to how they
may go about preventing mismanagement within the company. While their liability
has been restricted to cases where they should have acted diligently but did
not exercise care, independent directors are still uncertain as to the extent
they must go to detect and correct the wrongdoings of a company.

1
V. Umakanth, A Cautionary Tale of the Transplant Effect on Indian Corporate
Governance, 21(1) NAT. L. SCH. IND. REV. 1, 33 (2009).