Insufficient protection from unfair prosecution, say 81% independent directors: CII-Protiviti-NFCG study

A recent survey conducted among independent directors (ID) of Indian companies has found that 70% of the respondents find extreme level of legal actions as one of the reasons for increasing resignations among IDs. A higher percentage (81%) said there are insufficient legal safeguards from unfair prosecution and reputational damage. Majority of them believe that the roles and responsibilities of IDs, as defined by the Companies Act, are unreasonable and the expectations are onerous.

The study was conducted by Confederation of Indian Industry (CII), Protiviti Member Firm for India and National Foundation for Corporate Governance (NFCG). The survey covered over 100 IDs from a spectrum of companies across industries, including multinational corporations, Indian conglomerates, and other businesses. The outcome flags concerns of IDs and highlights areas of improvement pertaining to their roles, responsibilities and liabilities. They also commented on the existing risk management practices & internal control challenges they face. The role of the auditors was also discussed.

"Corporate governance is not merely about compliance. Owing to reasons such as protection of investor interests, promotion of transparency, raising disclosure standards to international levels, and building public confidence, CII has emerged as a forerunner in the corporate governance movement in India. This study report stands out to be one such endeavour, intended for voicing of pertinent issues by Independent Directors on need for companies to be more cognizant of their internal control parties and governance behaviour," says Ajay Bahl, Chairman CII Task Force on Judicial Reforms co-founder and managing partner AZB & Partners.

According to the study, 52% respondents believe that auditors do not provide adequate inputs and there is a need for improvement in the way they discharge their role. Key risks and controls related to several important areas like operational controls, cyber and data security, fraud, investment risks are not getting adequate importance, they said. On the roles and responsibilities as defined by the Companies Act, 60% said they are unreasonable and onerous. While IDs have to provide written assurances confirming the framing of Internal Financial Controls and compliance to applicable laws, this goes beyond their scope as non-executive members, they pointed out. Another 60% say that they do not have adequate resources to confirm the health of internal controls, and are relying on the integrity of the information shared with them by the management and auditors while assessing the company's decisions and detecting deficiencies.

"Companies will need to focus effectively on critical areas that includes strengthening of internal controls, risk and governance framework, clear segregation of responsibility between Key Management Personnel, Executive Directors and IDs, and ensuring board diversity in terms of both industry and functional expertise," Puneet Gupta, managing director, Protiviti Member Firm, says.