A majority of independent directors on the boards of Indian companies are reluctant to accept new positions as directors and, instead, prefer advisory roles because of inadequate safeguard against reputational damage and unfair prosecution, said the Risk Management and Internal Controls study, jointly conducted by industry body Confederation of Indian Industry (CII) and consulting firm Protiviti.
As much as 81% of the 100 independent directors,who participated in the study said there was no legal safeguard against unfair prosecution or reputational damage. according to the study.
Many independent directors also said safeguards under the Companies Act, 2013, were debatable and they were vulnerable to wrongful prosecution. The survey participants said while the Companies Act delineates safeguards for independent directors, several other Acts do not make such distinctions, resulting in potential financial, legal, and reputational risk. Unlike companies, which have in-house teams to fight legal battles, independent directors are often left to fend for themselves, which leads to both financial and reputational loss.
Besides, 70% of study participants said, recently, legal action against such directors were extreme, which resulted in mass resignations from boards over concerns of associated liability and hesitancy in considering the taking up of new positions and increasing preference for advisory roles. Independent directors are favouring reputed organizations with high corporate governance standards and avoiding smaller firms.
Internal controls are not as robust as reported in annual reports and many companies have a casual approach towards control mechanisms, 89% of independent directors surveyed said, highlighting the role of internal controls at corporations for maintaining high corporate governance level.
“It is often treated as a tick-in-a-box exercise. Control testing is frequently performed at a transactional level and not extended to key risks a company is exposed to at the enterprise level. Other reasons cited were weak compliance and internal control systems, poor auditing practices, and lack of independence of auditors,” the study said.
Around 60% of independent directors said they do not have adequate resources to confirm the health of internal controls. They also highlighted audits as a key challenge to execute their responsibilities.
Auditors do not provide adequate inputs and there was need for improvement in the way they discharge duties. Considering the recent instances of fraud, audit standards must be improved and focus on key risks, such as cyber and data security, fraud, investment, environmental, social and corporate governance risks, should be strengthened, 52% of independent directors said, according to the study.
Around 55% respondents said companies must strengthen the risk management systems and processes.
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