Yes, Governance Matters.: Non-executive directors needn’t get caught up in cases of corporate fraud

Non-executive directors needn’t get caught up in cases of corporate fraud

This article was first published in www.livemint.com (May, 01, 2025).

The Gensol-BluSmart crisis has drawn corporate fraud in India’s startup ecosystem into thespotlight. It has sparked a debate over a ‘fake it till you make it’ culture and whether it’s driven bysheer greed, naive optimism or intense pressure to keep the company’s stock on an ever-risingcurve.

While the causes remain debatable, the consequences of corporate fraud follow a predictablepath. Once discovered, law enforcement agencies and regulatory bodies spring into action. Probesare launched, notices are dispatched and litigation ensues.

One may expect these proceedings to target executive directors, who are responsible for runningthe business and its affairs. But that is not the case. They invariably implicate all board members,including those who serve in non-executive roles, such as nominee directors appointed by privateequity fi rms.

This occurs despite the stark difference between the roles of executive and non-executivedirectors. The latter play a limited role on the board. They represent the shareholders thatnominate them. As their involvement is usually restricted to attending board meetings, they oftenhave no clue, let alone knowledge, of any fraud. Nonetheless, they fi nd themselves arrayed withthose accused of carrying out the fraud.

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Authors:

– Anurag Shah and Viral Mehta

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