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Corporate Governance

We may be seeing the first signs of boards coming of age

Directors resigning from the boards of Indian companies with a diplomatic letter to the board are nothing new. But what happened with the JM ARC board recently marked a major shift in the way independent directors have acted. Anil Khandelwal, independent director on the board of JM Financial, ARC went on to resign putting down serious governance issues as the reason in his resignation letter. So, what exactly were the major concerns that he had?

What happened at JM ARC?

In a span of a few days, two very senior bankers, H N Sinor and Anil Khandelwal, resigned as independent directors from the board. While Sinor was subdued in his tone, the letter from Khandelwal was a lot more direct. In his mail to the chair, Khandelwal highlighted serious lapses in corporate governance on the board of the ARC. Firstly, he has highlighted that most members of the board had chosen to ignore constant reminders about the falling standards of governance followed. Khandelwal had also objected to the practice of inviting non-board members to board meetings. This is a common practice in family run businesses but Khandelwal had felt that it was against corporate governance practices. Lastly, Khandelwal had also objected to the board assigning executive powers to the non-executive chairman of the board. Despite his constant reminders, Khandelwal opined that the board had done little; leading to his decision to resign.

A step away from diplomacy

The move is significant because it marks a clear step away from the standard practice. In the past, most independent directors had avoided confronting the board. By putting down his reasons for the resignation on paper, Khandelwal has actually helped to highlight serious lapses in the standards of corporate governance. There have been concerns, especially in cases like IL&FS, that a more assertive bunch of independent directors could have avoided the crisis altogether. Being privy to the most privileged information about the goings on at the company, these independent directors are the best positioned to raise the red flags. To that extent, putting down the reasons for resignation on record puts a lot more pressure on company boards in future.

Onus is now on others

The onus is now on other independent directors and also the institutional stake holders to assert themselves in the larger interests of shareholders. A major lesson learnt in the last few months is that stock markets are going to really punish companies for weak corporate governance. We saw that in case of Yes Bank, ICICI Bank, Infibeam, Manpasand Beverages and PC Jewelers. It is time for independent directors to take on more accountability for their role on the boards of companies. Khandelwal may have set the cat among the pigeons and it may actually be good for India Inc!