Ramanand Mundkur participates in the IR Global Guide – International Governance: The Risks You Face as a Global Director
Foreward by Andrew Chilvers
As companies continue to look for opportunities in global markets, directors from diverse jurisdictions are hired to serve on the boards of foreign businesses as well as domestic ones that have operations and assets in other countries.
Enterprises across the world look for directors from other jurisdictions for any number of reasons. Hiring board directors from other countries can help to build investor confidence, for example. Likewise, an enterprise that is headquartered in a different jurisdiction but with a subsidiary in the US or Europe could seek directors to gain expertise and credibility. The director may have valuable international or local geographic expertise regarding business objectives, strategy, operations and risk management.
Nevertheless, serving as a director on the board of a global enterprise can bring major challenges. It’s true that during the past few years corporate governance laws and regulations have started to converge across regions, but there remain critical international differences regarding the responsibilities and liabilities of directors.
With recent data protection legislation across different jurisdictions, companies are now being held to account regarding their use of personal data. Will this result in a more litigious culture for companies and what does this mean for boards?
For some time now, Indian law has contained provisions that make a director or officer of a company personally liable for offences committed by the company. Such provisions exist not just in company law, and securities regulations, but in other areas of law as well, including health and safety regulations.
In relation to personal data, the Personal Data Protection Bill, 2019 (that is currently being discussed by India’s Parliament) has similar provisions. Therefore, if a company were to commit an offence under the proposed data protection law, a director or officer of the company could conceivably be made liable for the offence (including by way imprisonment or fine), particularly if the offence was committed with the individual consent or connivance of the director or officer, or if the offence is attributable to neglect on that individual’s part. Such provisions appear to continue the approach to personal liability followed in other laws.
In addition, laws in India already require company directors to monitor the effectiveness of their company’s governance norms, and to satisfy themselves as to the robustness of their company’s risk management and control systems.
It is therefore debatable whether recent data protection legislation will, of itself, result in a more litigious culture in India – in any event, as the data protection legislation is still being developed it is perhaps premature to hazard a guess in this regard.
What is clearer, and probably more significant, is that the obligation of company boards to exercise more diligence and more oversight in relation to how a company operates (and not just on what results the company achieves) is growing in importance. Therefore, boards are expected to pay significant attention to compliance and controls and would do well to dedicate more time and resources to these aspects of doing business.
With global directors now increasingly in demand, how important is it for boards and directors to understand the different expectations of directors and different cultures of governance?
It is important for global directors to be sensitive to both local cultural relationships, and global trends in corporate governance.
About 30 years ago, most boards in India could have been easily accused of being guilty of adopting overly ‘promoter-friendly’ approaches. That has changed now and it continues to change. After a series of corporate governance scandals in India in the last two decades, the laws have changed rapidly to fill in the gaps in corporate governance that existed previously.
The need for governance and controls is now mandated by various laws in India. For example, the law now sets out clear fiduciary duties and responsibilities of individual directors (this was previously unclear and left to judicial interpretation); the law also strictly regulates related party transactions and conflicts of interest; it mandates the appointment of more independent directors and more women directors in the boards of listed companies; and it even requires regular ‘self-evaluation’ of directors in listed companies. In addition, most Indian subsidiaries of foreign multinationals are familiar with Sarbanes-Oxley compliance requirements.
While these developments primarily concern publicly listed companies and subsidiaries of foreign multinationals, a similar trend is also being witnessed in privately held Indian companies. These smaller local companies are also adopting better corporate governance practices, either at the behest of financial investors or, in some cases voluntarily, in the hopes of becoming attractive to venture capital and private equity funding. Additionally, many Indian companies recognise that foreign laws like the FCPA and UK Bribery Act apply to the overseas operations of US and UK businesses, and are now comfortable signing on to compliance codes based on these foreign laws.
This said, applying international governance standards does not imply sacrificing local customs. For example, it has been a common cultural practice in India for businesses to give gifts to customers, vendors and even government officials during the annual Diwali festival. By applying clear, gift-giving codes and policies that include various controls, Indian businesses have been able to ensure that such gift giving does not result in bribery.
How important is an effective board that follows core principles of international corporate governance? Does this give boards a shield against litigation and other issues such as bankruptcy and bribery?
In our experience, the benefits of following core principles of corporate governance go beyond shielding the board’s directors from litigation. In a number of companies where boards consistently follow high standards of corporate governance, we have seen how employees (and in some cases even vendors dealing with company) see such board behaviour as defining the framework of their individual action. In other words, the consistent application of such principles has a long-term beneficial impact on the overall culture of the company (and even its wider ecosystem).
Admittedly, following core principles of corporate governance does not, of itself, guarantee sterling financial performance and therefore might not be a shield against bankruptcy. But it is often an effective shield against litigation and other issues such as allegations of bribery or tolerating an unsafe or unhealthy work environment.
As indicated, in response to the second question, above, global corporate governance practices and requirements are converging in many areas. Compliance therefore has the added benefit of de-risking international business transactions and thereby encouraging international trade and investment.