Are boards responsible for management action?

Sep 03 2013, 02:43 IST
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SummaryCompany boards are, without doubt, responsible for the actions of the management but holding them accountable for every violation is something that has to be done with great care

Amit Jain

It is natural that in the case of any corporate failure, questions are raised on the role of various players who are in any way associated with the company. Besides promoters/key managerial personnel in charge of the affairs, in such situations, typically, there is extreme speculation/debate on whether regulators, auditors, independent directors, etc, discharged the responsibilities expected of them.

The recent suspension of trading in contracts by the NSEL has again put this issue up for debate. A brief summary of the case: NSEL was allowed to carry spot trading of commodities subject to compliance of conditions prescribed by the ministry of consumer affairs. It introduced novel products in 2010 and business increased steadily. However, subsequent events seem to indicate that certain fundamental safeguards/compliances expected of the exchange might not have been complied with, e.g., conditions prescribed by the consumer affairs ministry such as restriction on short-sell, the 11-day limit on settlement period, etc. With no resolution in sight to the proceedings over non-compliance (on since 2012), authorities directed NSEL to discontinue spot-trading of commodities. While several takes on the causes of the crisis have been aired, apportioning responsibility needs greater insight on the roles and responsibilities of the offices involved. However, the office which failed to execute its responsibilities diligently is ultimately responsible for an undesired result.

The Companies Act, 1956, refers to two specific categories of directors—managing directors and whole-time directors. Under the Securities Contract (Regulation) Act, 1956, directorial positions have been split into three—executive director, non-executive director and independent director. A combined reading of the above suggests that managing directors/whole-time directors/executive directors work full-time for their companies and are involved deeply in the day-to-day affairs of the same. On the other hand, non-executive and independent directors are expected to exercise due care and diligence in providing guidance and oversight of company affairs and need to stress on high level of compliance from key managerial personnel. Regulators have placed significant responsibility/trust on independent directors so that they act as custodians on behalf of all shareholders and specifically protect minority/external stakeholders’ interests. While non-executive and independent directors contribute to corporate decision-making with their wide experience and professional expertise, it is the managing directors, whole-time directors, executive directors and key managerial personnel (who may not be on the boards) who contribute further by conducting the operations of their companies.

Considering the recent corporate frauds, accounting scandals, etc,

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