Some directions for directors

The road ahead seems bumpy for directors. It is clear the Companies Act, 2013, lays down more stringent duties and liabilities for directors. Failure to perform them will attract punitive punishment and fines and could also debar directors from continuing on boards.

Adding to the worries is a recent court order in the Satyam case holding the independent directors guilty of not performing their duties and imposing huge fines on them. But should directors shy away from taking positions on boards for fear of being punished? Is it more prudent to understand and educate oneself about the new roles and duties and try to perform them as well as possible?

The latter approach seems more acceptable than the former.

Many directors, especially the nominees of investors, have even started toying with the idea of having all the resolutions considered and approved by the shareholders instead of the board, and only have an observer seat on the board to represent the investor. The intention is to avoid the responsibilities but, as a shareholder, be part of the decision-making.

Section 179 does permit shifting of powers from the board to the shareholders but that should be used judiciously. The very idea of transferring all resolutions to the shareholders (as a way of not taking on the directors’ responsibilities) should be shunned, else the basic fabric of corporate structure which has a clear demarcation between the owner and the management, will be destroyed. Consequently, the boards will become infructuous.

As far as directors other than independent directors are concerned, it will be incorrect to say their duties were suddenly introduced in Section 166. Their duties evolved through judicial precedents. For example, the duty to act in good faith with due and reasonable care and diligence provided in Section 166 already existed even before the new Companies Act came into force. So what has changed now?

Firstly, the duties have now been clearly codified in the statute with punishment for non-performance. Monetary fine ranges from ₹1 lakh to ₹5 lakh. Secondly, some duties are more stringent and rather strange now. For example, directors are now required to act in good faith not only for the sake of the members of the company but also its employees, the community and protection of the environment.

This is a complex situation. Imagine if the board has to take a decision on retrenchment; this could be in the best interests of the company but may not be good for the employees. Whose side should the directors take? Are they even permitted to take sides? What should directors do in such a situation? How will they strike the right balance? The underlying principle which directors must be aware of is to ensure the best interests of the company and the employees at the same time.

Independent directors could have a harder time. Unlike in the Companies Act, 1956, the new law has expansive provisions for them. They include a specific code of conduct with guidelines on role, duties, appointment, re-appointment, and so on. Although independent directors followed their own unwritten code, the code now written in the statute book makes them more accountable. Not only should they clearly acquaint themselves with their role and duties but also know how to defend themselves if they are questioned on their performance of duties.

One important aspect which every independent director must be aware of is that they are only liable for acts which occur with their knowledge, “attributable through the board process”, and with their consent or connivance or when they do not act diligently. This should be their defence in any proceedings against them.

The answer lies in being well informed of the legal provisions than shying away from board responsibilities.

The writer is a partner at J Sagar Associates. The views are personal