Genso(L)essons: Role of Independent Directors in Curbing Corporate Frauds

Regulatory actions against Gensol and its promoters have once again highlighted how some start-ups that emerge as listed companies are still managed like fiefdoms by their founders. SEBI’s interim order has sparked discussions about further streamlining related party transaction reporting and tightening audit accountability. However, the role of independent directors in preempting fund diversions by promoters or founders has not received sufficient attention in corporate governance discussions. 

The statutory role of an independent director is to foster objectivity in board processes and cultivate a culture of integrity and trust in boardrooms. The law mandates independent directors to exercise their ‘independent’ judgment and character to uphold the company's and its stakeholders' primary interests. Gensol, as a listed company, had independent directors on its board.  Notwithstanding, the promoters brazenly enriched themselves at the expense of investors. An independent director on Gensol’s board revealed to mainstream media that independent directors had lesser visibility over the company's financials than its lenders. This situation presents a significant governance issue: What factors empower promoters to disregard the presence of independent directors while managing their domains? 

One plausible explanation is that independent directors often do not realise their potential and, therefore, fail to act diligently and effectively. The code of conduct prescribed under the company law requires this class of directors to contribute their independent judgment to the board’s deliberations. Independent directors have a duty to satisfy themselves regarding the company's financial information, financial controls, and risk management systems. Given their responsibilities, how do they perform these responsibilities when there is pushback from the founders and the management of the companies? The answer lies in ensuring access to sufficient information and dedicated professional support for the independent directors, enabling them to fulfil their duties independently. 

Corporate law in India sufficiently supports independent directors in performing their functions diligently. They have to be mindful of the rights and powers granted to them under the company law:

1. Realise their ‘independence’ from all stakeholders, including promoters or founders. The role of an independent director is to safeguard and balance the interests of multiple stakeholders in a company, not just its promoters or management. 

2. Always seek clarification when in doubt or suspicion. Independent directors have the right to request information from the management, enabling them to participate constructively in the board process. If the management fails to address their concerns or questions, independent directors should insist that their concerns and the management’s response are accurately documented in the board minutes. 

3. Wherever necessary, engage external legal or financial experts for appropriate professional advice at the company's expense. A separate budget should be earmarked for such consultations by the independent directors. Additionally, to facilitate access to this budget for the independent directors, it should be supervised by the company's audit committee rather than its board or management. 

4. Be accessible to the stakeholders. A dedicated communication channel should enable employees, shareholders, auditors, or other stakeholders to report concerns regarding unethical or fraudulent activities. Such a communication medium should not be accessible to the company's management. The idea is to inspire confidence among the stakeholders and ensure flexibility in reporting violations directly to the independent directors so that the management can be held accountable through the board. 

5. Do not simply quit; proactively report violations. Access to adequate information and appropriate professional advice are two key elements that enable independent directors to form objective opinions about the state of affairs. If they spot violations, they should flag them to the board. In case the violations are egregious and management is complicit beyond redemption through board processes, independent directors should not hesitate to report them to regulatory authorities.  Independent directors should never forget that they are the sentinels for the company, not mere corporate bystanders. 

Despite these powers under company law, independent directors still encounter the wrath of management and the non-independent segment of the board. Their proactive measures may be labelled as unfair obstructions or intrusive oversight into the company's functioning. The key to overcoming these challenges is to use their powers fairly and independently. Independent directors should seek expert or legal guidance and ensure that each step to fix accountability is adopted based on concrete materials and assessment. Professional advice and the determination to safeguard the broader stakeholder interests should enable independent directors to pre-empt corporate fraud and help navigate their company through the regulatory challenges.