Misgovernance Warning Signs explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
Operational wrongdoing needs no board approval — so by the time it reaches the board, the damage is already done.
The old problem
This paradox of good people effectively participating in bad decisions is not new or unique to modern day corporations. Our ancient scripture "Mahabharat" also contains instances where despite the presence of many elderly and wise people, decisions and actions against all principles of ethics were indeed taken. The danger of evil overcoming good at the board table is an eternal real peril and must be guarded against.
The guarding process begins much earlier than the likely manifestation of the evil. An independent director must be on guard all through and not only at board meeting.
The reasoning is precise and worth setting out in full: the role of the independent director is a 24 by 7 by 52 role. It is NOT a role to be played only 4 times a year at board meetings. The Company's business keeps running all through the year and therefore bad governance or wrongdoing can also take place all through the year.
Then the decisive sentence: usually, approvals from the board are not required at the operational level. If therefore there is any muck at that level, matters will be apparent to the board only after substantial damage has been caused.
That is the structural gap. Board oversight operates on the things that come to the board, and misgovernance overwhelmingly happens in the things that do not — procurement, channel arrangements, expense claims, revenue recognition at the margin, dealings with related entities below the approval threshold.
A director who is diligent only in the boardroom is diligent about the wrong population of decisions.
The proposed remedy is modest and practical: a simple process could be set up — to have a monthly call with the CFO or the CEO or both. There can also be a call that involves all directors including the non-independent directors. One can also seek a customised information pack every month.
With one boundary, stated immediately: the only care to be taken when one gets involved in such monthly MIS or calls is that the non-executive nature of the independent director's role must be always preserved. The Company's executive directors should be left to do their job and the independent director should not meddle into the day-to-day affairs.
The distinction is between staying informed and taking over. A monthly call that asks how things are going is oversight; one that directs what to do next is management.
Finding misgovernance warning signs in the public domain
Most of the information about the industry or about the specific business of the company is available in some form or the other in public domain, on the Internet. If you install a Google alert around the name of the company or of the individuals in leadership positions or around the specific issues prevalent in the company, you will be elegantly kept posted by Google, effortlessly all through the year.
| Set an alert on | Why |
|---|---|
| The company's name | Litigation, regulatory action, market commentary |
| Individuals in leadership positions | Personal matters that become company matters |
| Specific issues prevalent in the company | Developments in a known problem area |
The middle one is the least obvious and often the most informative. A leadership figure's other business interests, disputes or public statements rarely reach the board pack.
Misgovernance warning signs in the room itself
It is also important for independent directors to be alert at meetings and figure out if the optics are misleading and the reality is something else. Most independent directors are experienced enough, with at least 20 years of experience. They are usually able to tell a correct statement from a wrong one, based just on a prima facie scrutiny.
Human behaviour, especially deviant one, falls into certain common patterns which are industry-agnostic. Thus, if someone is lying to you, he or she would give enough cues — through body language or by the absence of logic. These cues would be the same across industries and may not need much investigative work. At the least you can have enough prior notice through a doubt about what could be going on.
The most useful phrase there is the absence of logic. Body language is easily misread; an explanation that does not hang together is a fact, and it can be tested by asking a further question.
Common mistakes
- Treating misgovernance warning signs as something that surfaces in board papers.
- Engaging with the company only four times a year.
- Turning a monthly information call into operational involvement.
- Accepting an explanation that does not follow, because the speaker is senior.