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Liability of Independent Directors

Last Updated: Saturday, June 26, 2010 - 15:36

Shobhika Puri

The role of Independent Directors on the Board of a company is under scrutiny once again after the Bhopal gas tragedy verdict. The court has held Keshub Mahindra, ex-chairman, Union Carbide India, guilty and sentenced him to two years of imprisonment, though he was immediately out on bail.

The magnitude of the disaster is such that extreme emotional reactions are justified more so because even after 26 years, justice has still not been done. But, companies cannot run on such emotional reactions alone. One has to take a logical and rational view of every incident.

If one thinks emotionally, then the entire top management of Union Carbide could be sent to jail. If this is so, why leave out accidents in other companies, irrespective of their scale? Their top management could also be sacked and sent to jail. Moreover, the government too is responsible for inaction in the past 26 years. Since various parties have been involved directly or indirectly, all of them could be held responsible and sacked and maybe sent to jail. This would wipe out the majority of the politicians. The remaining could be sacked for their inaction in dealing with other accidents. This way, most of the corporate and political leaders would be in jail. But, would this be correct? Who would lead the country then? Looking at the consequences of being in a leadership position, how many people would be willing to come forward?

It is one thing to blame the Board for any industrial accident but, another to paint every Board member with the same brush. Keshub Mahindra is a very respectable industrialist whose contribution to the country is unquestionable. It is sad to put him in the same bracket as those whose negligence led to the accident. He was the non-executive Chairman of Union Carbide India when the accident took place. He attended only a few meetings in a year and took a macro view of the company’s developments. How can he be expected to know the ground level technicalities?

It is irrational to expect a non-executive chairman to know whether a technician has designed the systems properly or not, whether the designs meet the safety standards, etc. This is where the concept of specialisation of labour comes into picture. Organisations like Union Carbide are too huge for the top management to micro manage. This is precisely the reason why managers under managers and specialists are hired. Practical reality demands that the manager delegates authority and trusts his subordinate’s decisions. If this is not the case, then the role of the entire middle management would vanish. In such a scenario, it would become the responsibility of the Chairman or the CEO or Directors to get involved in the operational issues. Is it viable?

This is in no way to suggest that the Independent Directors be exonerated of any such accidents. They should be held responsible but, their punishment could be different. They can be removed from their post. They can be made responsible for undoing the wrongs done by ensuring rehabilitation of the people, removal of toxic wastes, etc. Having said this, it should be noted that if after investigation it is found that any of the Independent Directors was aware of the danger, then he or she should be held responsible.

On the other hand, people whose direct responsibility was to ensure safety of the plant should be held responsible for negligence. This should be across the hierarchy starting from the lowest ranks to the senior most person in the concerned department. It is these people who were aware of the day-to-day functioning of the plant and thus, were directly responsible for the accident.

At present, the way Keshub Mahindra is being treated by the public at large would discourage such experienced and talented people from being on the Board of companies. According to a study, post-Satyam fiasco, 370 people left Boards of various companies, fearing a backlash against them for incidents over which they do not have any direct control, or knowledge.

If such is our treatment of senior industrialists like Keshub Mahindra, then it would become difficult for companies to find deserving people willing to take up the role of Independent Directors. In fact, for companies producing hazardous materials, it would become difficult to find people even for their top management positions.

Thus, it is high time we thought rationally and looked at the bigger picture. It is very easy to put all Board members and the top management into jail but, would that solve the problem? Would it prevent future disasters? What would be the fallout of such extreme steps? It is one thing to get emotional about such accidents but, another to deal with them.

(Shobhika Puri is a freelance writer)

First Published: Saturday, June 26, 2010 - 15:36

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