Is Director’s Liability Spiraling out of Control?

The Economic Times of 29 December, 2017 featured an article headed “Compliance Blues Spark Exodus of Independent Directors”. We learned from this article that 982 independent directors have resigned in the past two years and 150 of those in the past 2 months.  Is this an indication that compliance obligations have become too severe and good men and woman are abandoning boards throughout India to avoid being nailed by technical violations they never see coming?

While this argument may seem superficially appealing, it is hardly a conclusion supported by the facts.  India has revamped the Companies Act and continues to do so, slowly reshaping it to bring India from a laggard in corporate governance to a potentially, a world leader.  An aggressive move, but thoroughly consistent with the Modi-Government’s efforts to replace the old and ineffective and make India more business-friendly; an effort that has already accelerated India up the ease of doing business league table.

Innovative reforms are rapidly changing India’s corporate landscape, but they also need to change behavior and liberalization brings with it certain obligations that require directors to step-up and provide leadership. Long gone are the days when all a director had to do was attend 4 meetings a year and studiously read anything the company saw fit to disclose to them.  When fiduciary obligations were based on failures to meet amorphous obligations such as duty of care and the need to apply best and honest endeavours, prosecuting non-compliance was always a complex and lengthy affair.   

The Companies Act 2013 and the amendments that followed have clearly been designed to create affirmative obligations that require directors to step up.  Take for example; Section 134(5)(f) which requires that the Directors’ Responsibility Statement shall state that the directors have devised proper systems to ensure compliance with the provisions of all applicable laws and that such systems were adequate and operating effectively.  These words are far from vague corporate-speak but represent real and well-thought out obligations that should be read as a clarion call to all directors that the era of snoozing though board meetings is over.

The Ministry of Corporate Affairs (“MCA”), November, 2017 report noted that 2.24 Lakh companies had been struck off up to 5th November and more than 3 Lakh directors had been disqualified.  While these numbers may be shocking, it is in this writer’s view very good news for corporate India.  It proves the resolve of MCA to purge the multitude of dormant companies and eliminate directors who sat on delinquent boards incapable of filing financial records or annual returns. These actions matter and MCA’s good work is being noticed internationally where India’s reputation as being a mine-field of red tape is being severely dented.  Anyone visiting MCA’s website will be greeted by a pop-up trumpeting the ability to incorporate companies in one day!

So, are directors’ liabilities spiraling out of control?- nothing of the sort.  India is taking bold and innovative steps to improve the state of corporate governance and the process will inevitably require more wrecking-ball tactics to dismantle the dummy corporate structures and strengthen those who are left behind.  This is still work in progress and independent directors who have been put in the spotlight by the 2013 Act are on notice that much more is expected of them.  

None of this should invoke fear in the hearts of dedicated company directors who take their roles seriously.  India’s infrastructure and support for directors continues to strengthen.  The Institute of Directors, MCA and numerous academic institutions provide excellent training and certification for those are willing to learn.  Technology will play an important part in the solution. Automated compliance tools, intuitive dashboards and the beginnings of cognitive computing are all exploding to fill the chasm in which these nascent liabilities await.  

However, as impressive as these capabilities may be, none of this will help unless directors commit to learning and using the tools that are available.  By doing so, not only will they avoid the spiral but they will contribute to making India a much more appealing place to do business.  

John Matheson

Chairman

OneDelta Synergies Singapore Pte Ltd.

OneDelta is a legal-tech solutions company that automates legal compliance and document management.  It is headquartered in Singapore and runs its engineering operations out of Bangalore. www.onedelta.in