"American Clean Energy and Security Act - 2009"

"American Clean Energy and Security Act - 2009"

Landmark legislation to curb U.S. greenhouse-gas emissions was approved by the House of Representatives in a close vote late Friday (26-06-2009) To Read the News on Wall Street Journal (WSJ) Click Here

Role of Independent Directors - Company Act

In a recent news article published in the Hindustan Times dated 19th June “ Law to steer independent directors”

It’s an excellent step being initiated by the government to review the role of Independent Directors. In the Indian context, it is known that the many of the companies are controlled by the families and would like these to be handed over to their sons and daughters. The promoters may pursue interests that are not necessarily desirable from the point of view of the commercial success of the company. The promoters are all powerful making even the well qualified IDs, as in the case of Satyam having people like; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…, appear dwarfs and not of independence.

In most of the companies, it is the promoters who headhunt the independent directors – who are actually, friends, family members and even family lawyers, thus discouraging dissent in the board rooms and the board meetings are very cool and cozy and companies fail with respect to compliances for full disclosures and transparencies.

India’s corporate governance codes are on par with the best in the world what matters is keenness in implementation of these in practice. There are limits to legislations on corporate governance as a lot depends on the integrity and ethical values of various corporate players such as directors, promoters, executives and shareholders. The corporate governance is not only a “check-the-box” requirement but much more than to it.

Therefore, in the present situation questions are being asked ”Scrap the System of Independent Directorship in the Board?” - Is scraping of the system of IDs has the solution?
What are the role and responsibilities of an Independent Directors?
How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……?
Does the self regulatory mechanism has the solution?
How far SEBI or any other regulators been successful in controlling?

The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders.
The role of the independent non - executive is slightly more onerous than that of ordinary non - executives as they must also be completely free from any “conflict of interest”. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest. Therefore, independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles. These breed of IDs, who are needed to be well supported by the system, who would manage to represent the shareholders' interests faithfully and well. The key issue is that, we are dealing with a social system in a confidential operating environment.
If the board is qualified, independent and ethical then one can achieve all the other attributes of good corporate governance. If the board is not qualified they may miss something, if they are not independent they may pursue other interests ahead of those of the company and if they are not ethical company will have trouble sooner or later even if they appear to provide the other attributes.
It is impossible for regulators to regulate so that only ethical and strong people get onto boards.
Furthermore, the shareholders will have to help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviors in the boardroom:
• What skills each director brings to the board?
• How directors behave in the boardroom?
• What training needs were identified in the board performance review?
• What training has been delivered and what is planned?
• What specific governance/ director training do board members have?
Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director. It is therefore, pertinent that the ethical side of directorship needs to be recognized and managed far more than what it currently is.
In view of the foregoing, it is a pertinent that a holistic system has thus to be evolved, involving all stakeholders, which would address all those aspects, which would achieve the best principles of corporate governance.

AN EXAMPLE OF GOOD GOVERNANCE

“Environment ministry to eject double agents:” – HT Times 17th June 2009
It is good to see an intiative has been taken towards good governance in one of the ministry. Our congratulations to the Hon’ble Minister for taking such an initiative of transparent working in his area of influence.
The government as well PSU service rules are very clearly defined issues like “conflict of interests” and “cool off period” and suggest not to take any pecuniary avantages from clients or private sector employment immediately after their retirement but are being coveniently overlooked in many cases.
Many of the ExCMD/ Directors/Scientists/ Government officers at the highest levels have joined either their clients or private sectors immediately after retirement or holding parallel offices. The initiatives taken by one ministry should be emulated by other ministries, so that an example are set for good governance in the country and those holding similar posts should either resign immediately or sacked or removed.

How should board of directors handle Enterprise Risk Management?

The most extensive delineation of board responsibilities has been enumerated in the Canadian guidelines, which has identified beside other components the following two specific components:

1. Adoption of a strategy planning process.
2. Management of Risk.

The role of the board of directors in ERM oversight includes:

1. Determining a risk-adjusted corporate strategy and adequate metrics to track executive performance in the pursuit of such a strategy,
2. Approving a risk inventory and fundamental ERM parameters (such as risk measurements, risk appetite and tolerance levels) as part of the annual business plan.
3. Being about the effectiveness of designed procedures.

In determining its risk oversight structure, the board should conduct a preliminary analysis of corporate governance practices. Specifically, it should consider the following issues:

1. The independence, professional expertise, and time availability of board members; 2. The assignment of board oversight functions to specialized board committees;
3. The quality of the information flow between board members and management.

Delegating Responsibilities within the Organization: A growing number of companies have been assigning such leadership responsibilities to a dedicated chief risk officer (CRO). But companies should assess the time availability of existing executive positions, evaluate skills and expertise needed, determine the need to promote visibility and authority, and weigh a number of other issues before deciding whether such a position will prove a valuable contribution to the ERM efforts.

From the foregoing it is essential that, the board cannot and should not be involved in actual day-to-day risk management. Directors should instead, through their risk oversight role, satisfy themselves that the risk management processes designed and implemented by executives and risk managers are adapted to the board’s corporate strategy and are functioning as directed, and that necessary steps are taken to foster a culture of risk-adjusted decision-making throughout the organization. Through its oversight role, the board can send a message to the company’s management and employees that corporate risk management is not an impediment to the conduct of business nor a mere supplement to a firm’s overall compliance program but is instead an integral component of the firm’s corporate strategy, culture and value generation process.

Given the increased significance of the risk oversight role in the current risk environment, a company’s risk management system should function to bring to the board’s attention the company’s most material risks and permit the board to understand and evaluate how these risks interrelate, how they affect the company, and how management addresses these risks. It is important for directors to have the experience, training and knowledge of the business necessary for making a meaningful assessment of the risks that the company faces, however complicated they may be.

The board should also consider the best organizational structure to give risk oversight sufficient attention at the board level. In some of the companies, this may include creating a separate risk management committee or subcommittee. In others, it may be sufficient to have the review of risk management as a dedicated, periodic agenda item for an existing committee such as the audit committee, in addition to periodic review at the full board level. While no “one size fits all” it is important that risk management be a priority and that a system for risk oversight appropriate to the company be put in place.