Upholding Corporate Integrity: The evolution of independent directors' accountability

The rationale behind this amendment was to address a recurring issue where independent directors would resign citing reasons such as "personal commitments," raising suspicion and concerns about compliance. Resignation of IDs without accurate reasons left the regulators guessing reasons for the same. The watchdog has now compelled independent directors to specify reasons for their resignation, thereby bringing to light critical issues.

The market’s watchdog in the past has gone blazing guns at independent directors by levying penalties ranging from monetary to debarment in capital markets for failure in exercising due diligence. Some popular names include Limited, Limited, Sanwaria Consumers Limited.

Instead of providing generic reasons IDs are now obligated to delve deeper into the underlying issues prompting their departure. By shedding light on specific concerns such as non-compliance with regulatory requirements, questionable transactions, inadequate disclosures, or governance lapses, independent directors are shedding light on issues that may have previously gone unnoticed or ignored.

This evolving landscape of mandating reasons in resignation letters from independent directors becomes more exhaustive than ever before and aids in inspection, inquiry, and investigation to regulators. Parallelly these letters serve as crucial defense mechanisms for IDs, providing a comprehensive account of their departure reasons and asserting that these reasons are exhaustive. In the event of investigations or inquiries, such letters act as a shield, offering immunity to IDs by documenting their rationale transparently. These safeguard IDs who meticulously detail their reasons will be exonerated from liability.

A notable outcome of this amendment is the proactive role assumed by independent directors in safeguarding shareholder interests and upholding corporate integrity. Recent cases, including the Zee case, exemplify how independent directors, upon resigning, have cited concerns such as unjustified related-party transactions (RPTs) which were not at arm’s length, dubious valuations, or lack of satisfactory responses from management, prompting SEBI to initiate investigations that may eventually uncover instances. Another classic example was where independent directors resigned citing corporate governance lapses.

The impact of this regulatory intervention has been overwhelmingly positive. It has not only facilitated timely regulatory interventions to protect shareholder interests but has also instilled confidence in the efficacy of corporate governance mechanisms.

Having said this to my mind it is the test of ID’s wisdom as to when they rely on trust and when they take a call to dig deeper to inspect and accordingly decide upon further action and if need be, put forth a detailed resignation.

The significance of this regulatory change extends beyond mere procedural compliance; it signifies a paradigm shift towards proactiveness. By requiring them to disclose specific reasons for resignation and encouraging them to escalate governance concerns to regulatory authorities, it has fostered a culture of accountability and integrity within boardrooms.

In another notable stride towards reinforcing corporate stewardship, independent directors are now mandated to provide a comprehensive account of their resignation history from board positions within the preceding three years. This requirement underscores the heightened scrutiny surrounding ID appointments and emphasizes the profound responsibility and accountability associated with such roles. No longer can resignations be discreetly executed without repercussions; instead, IDs must meticulously consider their suitability for board positions, fully cognizant that their past resignations will be subject to thorough examination. This directive serves as a clear indication that IDs must approach their positions with utmost seriousness and diligence, recognizing the significant impact of their decisions on organizational governance and integrity.

The amendment mandating clear resignation disclosures by independent directors marks a significant milestone in strengthening corporate governance practices in India. It emphasizes the critical role of independent directors as custodians of corporate integrity and ensures that governance lapses are promptly addressed, ultimately fostering investor confidence and market integrity.

(The author is the founder of MMJC and Associates - Mumbai-based corporate compliance firm)