Companies are artificial juristic persons and need natural persons to make decisions. The conscience keepers of a company are, therefore, the individuals managing the show. The moral fabric of the company is also spun and woven by these individuals.
The law mandates that the company should not indulge in any illegal activities, and if it does, it has to be penalised. But, the periphery of law within which the company has to function is, at times, a bit hazy and can be interpreted in more ways than one. Individuals with not very high levels of conscience, or to say in other words, who have consciously decided and trained themselves to be ‘morally flexible’, make the most of the legal ambiguity.
To encourage good governance in the corporate sector, based on past experience the lawmakers in consultation with corporate leaders and other noted experts fine-tuned the regulatory mechanism and about 10 years back, made it mandatory to have independent persons – persons who have no financial stakes in the company and are in no way involved in the functioning of the company – on the board of directors, and are called independent directors. The functions these independent directors are expected to perform is to question various decisions made by the board, keeping in mind the interests of the society at large and also balancing it with the need for the company to survive and thrive. Primarily, they are expected to be unbiased, neutral, professional, honest, straightforward and frank candidates and most importantly, have a mind of their own. But, in a realistic world, it’s a tall order.
Given the fact that the promoters of the company have the prerogative to appoint independent directors on the board of a company, the entire selection process reflects the purpose for which the appointment has been made: either it could only be made to fulfil the legal requirement, or it could be done to move towards ideals and really give the power to independent directors to be the conscience keepers of the company so that the company gradually, but surely, moves towards higher business ethical values, legal compliance, and enhancement of social good. But, that is what ought to be. In practice, unfortunately, the story is different.
As bad money drives good money out of circulation, individuals with moral flexibility drive those with moral rigidity out of circulation. There are a good number of astute persons, who are sharp, intelligent and die-hard followers of the Eleventh Commandment – Thou shalt not be caught – ready to crawl when the company, read promoters, simply wants them to bend a little. Companies with nefarious unstated goals and respectable stated goals scout for such persons and without much effort can find them at almost every crossroads. They are available a dime a dozen. They always remain in the pockets, which often are quite deep, of the promoters. They should, frankly speaking, be called pocket directors, not independent directors. Corporate governance laws regarding independent directors fail to a large extent for such companies.
Talking about companies which do not have different stated and unstated goals, it is very clear from the beginning that such a company is looking for the right persons to act as independent directors who can really be the conscience-keepers of the company. They are given the freedom and liberty, rather are encouraged, to speak their mind, call a spade a spade, be at their vitriolic best, not to believe in avoidable niceties while writing scathing remarks, and must have the ability to see the big picture. Truly speaking, the corporate governance laws are not needed for such companies as they on their own try to transcend the already established norms of law, ethics and social good.
Hence, it boils down to the conscience of the promoters and the top management of any company.
It is remarkable to observe that the companies of both the types are able to find the ‘right person’ as per their requirements. Sometimes there may be a mismatch which creates the possibility of either the company somehow making the life of independent director difficult, or the latter himself resigning as he does not consider it fit and proper to be on the board of any such company.
Ultimately, birds of the same feather flock together.