Changing Nature of Governance in The Digitised World – A Room for Scrutiny

A Twitter shareholder has filed a federal securities class action law suite against Tesla CEO Elon Musk, alleging that Musk failed to disclose his 5% investment in the social media platform when he was required to do so. According to the complaint, the delay allowed Musk to buy more Twitter shares at a lower price, allowing him to defraud Twitter stock sellers of larger profits. According to the lawsuit, Musk began buying Twitter shares in January and by March 14 had bought more than 5% of the company. Under SEC Rules, Investors must disclose with the Securities and Exchange Commission (SEC) within 10 days of exceeding the 5% threshold. Musk reportedly did not file the paperwork until he had amassed a 9.1% interest in Twitter.

The state-owned PTC India and its finance arm, PFS, began to experience problems in January 2022. Cracks began to appear in PFS started after three independent directors resigned on January 19 alleging corporate governance issues at the systemically important non-deposit taking NBFC. Following developments, an independent director on PTC India’s board also resigned subsequently citing corporate governance concerns.

Recently Anand Chandrasekaran and Malini Chopra, two independent directors on the board of debt-ridden Future Enterprises Ltd (FEL) resigned, citing an increase in workload as one of the reasons for their exits. The news comes only days after FEL defaulted on payment obligations related to borrowing by FEL. Approx.  Twenty-Eight hundred crores payment was due to several banks and lenders.

These cases are unrelated and each of the situation is unique, arising in different context and geography. In some cases, governance may be a real issue and in some cases the allegations may be frivolous in nature. However, one thing is common and that is the expectations of stakeholders to know more what is happening behind close doors and the obligations on the Board of Directors to discharge their obligations in line with the stakeholders’ expectations.

As a result of various failures and frauds, the role and duty of directors is constantly expanding. In today’s world, an independent director is expected to play a significant role in all aspects of business, including the appointment of key managerial positions, risk management and strategic decision-making. Above all Independent Directors are expected to bring fresh perspective in discharging their functions, safeguarding the interests of minority shareholders.

Ecosystem in which Independent Director operates vary from company to company. Generally, in a company having sound Corporate Governance, Independent Directors gets all possible reports that he needs, access to business plan, reports of internal as well as external auditors to judge or estimate about the affairs of the company. Independent Directors get a compliance report. A lot of comfort is given to the independent directors. In not so well governed companies, Independent Director may face some challenges in obtaining some of the information. However, in both the scenario, if Independent Directors exercises adequate due diligence in performance of his duty, he or she may get clues about the operations of the company including the areas that needs wider attention.

The environment in which Independent Directors operate differs from one company to the next. In general, Independent Directors receive all necessary reports, access to the business plan, and reports from internal and external auditors to appraise or estimate the firm’s affairs in a corporation with strong Corporate Governance. However, In organisations that aren’t well-governed, Independent Directors may have difficulty in getting certain information. In both scenarios, if Independent Directors apply proper due diligence in the discharge of their duties, they may get insight into the company’s operations, including areas that require more attention.

There have been common failures on part of independent directors.. Failures can occur as a result of collaboration or wilful default in the fulfilment of duties. Many a times fraud has been committed despite exercise of diligence by Independent Directors. In such a circumstance, the larger concern is the moot question that what more Independent Directors should do in terms of exercising diligence or requesting information from the corporation to ensure that no fraud is being perpetrated.

In India according to published statistics, every year hundreds of Independent Directors are resigning. It cannot be ruled out that ID’s have certain degree of fear in discharge of their obligations and the future legal consequences that may arise on failure It is important to ponder that what kind of balance the investigating agency and judiciary should be looking at before proceeding to hold ID’s accountable. These are some of the pertinent questions that requires serious introspection.

The expectations from ID’s are provided under the law under schedule IV of the companies act, under section 149 of the Companies Act  2013. The expectation from independent director is certainly to be independent.  It is extremely important that Independent Director have independent stand on the board. One should feel free to ask the right questions, which has become the biggest limit of independent directors.  In case of an emergency, Schedule IV places a huge amount of responsibility and power in the hands of the independent directors. There have been several instances in corporate India, where independent directors have asked for massive changes including change of promoter chairman of the company.

The law specifies the expectations from IDs in Schedule IV and Section 149 of the Companies Act 2013. Independent directors are undoubtedly expected to be independent. Independent Directors must have a strong independent voice on the board of directors. Ability to raise right questions at right forums along with the intent and character to do so,  has to be one of the most important trait of leaders in the job of fiduciary responsibility. Schedule IV places a great deal of responsibility and power in the hands of the independent directors in the event of an emergency. In corporate India, there have been multiple cases where independent directors have requested major changes, including the replacement of the company’s promoter chairman.

Recently in US, the Financial Industry Regulatory Authority fined Robinhood Financial LLC a record $57 million and have ordered it to shell out $12.6 million in reparations for systemic supervisory failures that impacted millions of clients.

Recent case is an example of complex operation in a digitised World. Digitisation is throwing a new set of challenges for the Directors who have the fiduciary responsibility to protect the stakeholder’s interest.  From East to West Stakeholders want to know more about what is happening behind the closed door. Independent Directors have to up the standard of the game to keep the office of ID’s relevant.

Staff Galactik Views

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