Corporate Governance – a Growth Differentiator

I have been speaking with a large number of professionals, Board members, Promoters about the role of  Good Corporate Governance practices in growth of a company.  Every one understood Corporate Governance  means just a ‘legal compliance’.  Undoubtedly it is.  The Board of every company must ensure the legal compliance in the company. 

However, is the role of a Board stops there?  I believe that the Board of Directors of a company is the highest body who are collectively responsible for the fate of a company – its growth, its fall, its business, its strategy, its social responsibility, its value creation and so on..

I think, there is a role play required.  When a promoter is also having an executive role and sitting in the Board, he should be accountable to the Board as an ‘executive’ and as a ‘manager’ and not as a Promoter.  This thin line differentiation is important for better governance.  However, it is possible only when other Independent Directors also show equal amount of understanding about the company.  It is important for Independent Directors to get aligned with the project/s of the company where they are sitting on the Board in order to play a constructive role.  In absence of playing active role by Independent Director, it would be very difficult to implement Good Corporate Governance practices in any company.

For a good corporate governance, good independent director are required.

In view of this, what could be the starting point for implementing Good Corporate Governance in any company?  Need to take the following steps simultaneously –

i.                     Start with legal compliance – it should be from a legal intent point of view rather legal textual compliance point of view.

ii.                   Start training Independent Directors – about the company’s business, their role and responsibilities.

Then move step by step to build Good Corporate Governance process which will be a differentiating factor for Growth for a company.

Director Identification Number (DIN) – KYC

Recently, all those who have Director’s Identification Number (DIN) have received the following communication thru email from Ministry of Corporate Affairs (MCA):

“As part of updating its registry, MCA would be conducting KYC of all Directors of all companies annually through the new eform viz. DIR-3 KYC. Accordingly, every Director who has been allotted DIN on or before 31st March 2018 and whose DIN is in 'Approved' status, would be mandatorily required to file form DIR-3 KYC on or before 31st August 2018. While filing the form, the Unique Personal Mobile Number and Personal Email ID would have to be mandatorily indicated and would be duly verified by One Time Password (OTP). The form should be filed by every Director using his own DSC(Class 2) and should be duly certified by a practicing professional (CA/CS/CMA). Filing of DIR-3 KYC would be mandatory for disqualified Directors also.

After expiry of the due date by which the KYC form is to be filed, the MCA21 system will mark all approved DINs (allotted on or before 31st March 2018) against which DIR-3 KYC form has not been filed as 'Deactivated' with reason as 'Non-filing of DIR-3 KYC'. After the due date filing of DIR-3 KYC in respect of such deactivated DINs shall be allowed upon payment of a specified fee only, without prejudice to any other action that may be taken.”

There are few friends who have DIN but they are no longer a director of any company or there are DIN holders who are ‘very senior’ citizen like 80+ years old and no more active as a director of any company.  In such cases whether such KYC process is required?  If they don’t do such KYC process, then what happens?  The above email says – “… after the due date filing of DIR-3 KYC in respect of such deactivated DINs shall be allowed upon payment of a specified fee only, without prejudice to any other action that may be taken.”

Few friends asked me whether they could surrender their DIN? 

DIN can be surrendered only in the following situations pursuant to Rule 11 of the Companies (Appointment and Qualification of Directors) Rules, 2014 -

1.       the DIN is found to be duplicated in respect of the same person provided the data related to both the DIN shall be merged with the validly retained number;

2.       the DIN was obtained in a wrongful manner or by fraudulent means;

3.       of the death of the concerned individual;

4.       the concerned individual has been declared as a person of unsound mind by a competent Court;

5.       if the concerned individual has been adjudicated an insolvent:  Provided that before cancellation or deactivation of DIN pursuant to clause (b), an opportunity of being heard shall be given to the concerned individual;

6.       on an application made in Form DIR-5 by the DIN holder to surrender his or her DIN along with a declaration that he has never been appointed as a director in any company and the said DIN has never been used for filing of any document with any authority, the Central Government may deactivate such DIN.  Provided that before deactivation of any DIN in such case, the Central Government shall verify e-records.

So get DIN KYC done before the due date which is 31^st August 2018* or file DIR-5 for cancellation of DIN, if conditions fulfilled (point 6 above) or take proper professional advice.

(*The last date was extended till 15th September, 2018 without fee and now till 5th October, 2018 with a fee of Rs. 500.  Normal fee is Rs. 5,000.)

Disclaimer:

Information provided/shared is of general nature.  You should seek appropriate advice for your own situation.  You are highly encouraged to find and understand your obligations regarding disclosure and action.  And the author is in no way responsible for any action/non action or consequence to anyone based on this note.

Auditor’s Resignation & Corporate Governance

Recently, in one of the professional groups of Chartered Accountants, someone posted a newspaper clipping saying “.. 204 listed firms say auditors have quit, Govt launches probe..”  

 Few questions –

i.                    Are these Auditing firms absolved from their ‘responsibility of reporting’ to the shareholders even if they quit?

ii.                  Is the resignation and no reporting a ‘breach of duty’?

What is a breach of duty?  A breach of duty occurs when one person or company has a duty of care toward another person or company, but fails to live up to that standard. A person may be liable for negligence in a personal injury case if his breach of duty caused another person's injuries.  (http://www.rotlaw.com/legal-library/what-is-breach-of-duty/)

In a simple way, Shareholders are the owners of a Joint Stock Company.  Since they can’t participate in day to day affairs of the company and collectively can’t keep the control of the company, they appoint Directors to conduct the business.  At the same time they also appoint Auditors to report back to them about the state of affairs of the company, as conducted by the Directors.

Interestingly, an article appeared few days back in Mint newspaper says:

 “Auditor’s report to the shareholders is a powerful weapon. The auditor should use it fully to bring out the problems in the company’s financial reporting and controls. Resignation cannot be normally justified except when the auditor has a serious health problem or faces an extreme situation such as criminal intimidation,” said R. Narayanaswamy, professor of finance and control at the Indian Institute of Management, Bangalore.

“A better option (instead of resignation) in such cases would be to qualify the opinion, or even issue an adverse opinion. Auditors must publicly announce their precise reasons for quitting, otherwise there will be unhealthy speculation. Reasons such as preoccupation with other work are disingenuous, or too clever by half,” said Narayanswamy.”

(Source https://www.livemint.com/Companies/BvJdOymz8CVc17oL6gGauO/32-auditorsatlistedfirmshave-resignedin-last-5-months.html)

Auditing or ‘assurance services’ process – right from the appointment till the reporting, is a well settled process and the guidelines are provided under the law, by the Institute of Chartered Accountants of India and other regulatory bodies.  Assurance service is an independent professional service, typically provided by Chartered or Certified Public Accountants or Chartered Certified Accountant, with the goal of improving information or the context of information so that decision makers can make more informed, and presumably better, decisions. Assurance services provide independent and professional opinions that reduce information risk (risk from incorrect information) https://en.wikipedia.org/wiki/Assurance_services.
If the Auditors find something is wrong with the affairs of the company or they don’t get the information in order to give their opinion, they should report the same to the shareholders for their (shareholders) further action.  They should not simply RESIGN!  Auditors are under the obligation to report their findings to the shareholders.  Resigning may mean that they know something but don’t want to report!!

They (Auditors) should insist the Board of the company to circulate their findings to the shareholders.  If required, they should also be present in the meeting of shareholders and explain why they think like that.  Resignation is not a proper discharge of Auditors’ duty and definitely, not a good decision for a better corporate governance.

To bring in better transparency and governance, the Auditors should -

• not quit their job mid way unless there is a health issue or other legal disqualification/obligation
• if at all they want to resign, they should convey the reason for resignation to the company’s shareholders;
• give complete download of the state of affairs of the company to the incoming new Auditor and the ‘handover report’ to be made available to the shareholders thru public disclosers.

Let’s build the confidence of investors thru a better Corporate Governance.