If the Bhopal judgment results in independent directors and CEOs/plant managers waking up to their responsibilities, that can only be a good thing, writes Sunil Jain.
Ever since the Bhopal court gave a two-year sentence to those involved in the Bhopal gas tragedy, there has been a quiet chorus of support built up for the then Union Carbide India Limited chairman Keshub Mahindra in the form of newspaper editorials/articles - the latest to join this is the highly-respected HDFC chief Deepak Parekh (http://timesofindia.indiatimes.com/Business-India-Business/Govt-shouldnt-hound-independent-directors/articleshow/6060691.cms). The broad points made by him, as well as various others, are easily summarised:
Mr Mahindra was the non-executive chairman of Union Carbide India and so couldn't really be held responsible since he had no day-to-day dealings with the company.
If he was held responsible as a director, surely the same should have applied to various government nominees on the company's board.
If you hound independent directors, people will never want to become independent directors; you may even find it difficult to get a CEO or a factory manager for chemical companies manufacturing hazardous materials... "The CEO of UCIL at the time of the accident was less than one year old in the company. When the site was selected, when the plant was put up there, when the designs were made, when the start-up trials happened, he had nothing to do with it... But the CEO has been indicted."
The chairman and CEO of BP was not arrested, instead a $20 billion fund was set up to clean up the environmental damage. Why does India need to arrest Keshub Mahindra?
Mr Parekh's arguments sound logical, but a few important points need to be made, apart from the fact that Indian company law does not distinguish between executive and non-executive directors - that's something the courts have done from time to time, as in the case of not prosecuting independent directors for bounced cheques.
One, the sheer scale of the tragedy in Bhopal makes it clear the case is very different from the ones involving bounced cheques (Nimesh Kampani and Nagarjuna Finance) that Mr Parekh referred to or even corporate frauds (Satyam) where the highly qualified independent directors were caught napping.
Two, if you read Justice Ahmadi's amazing "even assuming that it was a defective plant..." judgment that dramatically reduced the charges under which Mr Mahindra could be prosecuted, you'll see the kind of things that were happening were something even a non-executive chairman should have known about.
And if he didn't, he had no business being there. The gas was known to be dangerous, so very strict procedures were laid down for how it was to be stored - at what temperature, what pressure, and so on. None of this was being done, possibly since the plant was to be dismantled and shipped out - the tanks were not pressurised, the refrigeration was not working, and a whole lot more.
There is little to suggest that either Mr Mahindra or his colleagues even asked about these basic issues of safety - if they had, the correspondence would have formed part of the Ahmadi judgment. And this despite the history of accidents in this very plant.
Three, and this is linked to the previous point, there is no evidence that, with a few exceptions, independent directors have fulfilled their primary task of protecting the public interest.
So, why make it mandatory to have such directors on any company's board? The so-called independent directors who get fees, fame and favours surely cannot be allowed to wash their hand of anything wrong the company does.
If these directors offer great advice to the company or help give it strategic direction, why not hire them as advisers? Hiring marquee directors gives the public the impression that they are supervising the company - that's how several NBFCs have in the past raised hundreds of crores of rupees on the strength of their independent directors who later claimed no responsibility when the NBFCs ran off - while they're doing nothing of the sort.
As for Mr Parekh's point about the judgment being unfair to the CEO of UCIL since he had been hired long after the design of the plant had been finalised, the obvious question is: Who is then responsible for anything? The designers will say the problem lay in the storage tank not being pressurised and the gas not being stored at zero degree Celsius!
Finally, the comparison with BP is inappropriate for a variety of reasons. For starters, there has not been a single human death in the BP case versus 15,000 or so in Bhopal, and a lot more affected by the gas - if there were any human casualties due to the BP oil spill, the story would have been very different.
Second, whatever you might say about BP, perhaps due to US President Barack Obama's kick-ass stance, it has said it will do the clean-up and will pay all legitimate claims for damages, hence the $20 billion fund.
In contrast, Union Carbide Corporation to date accepts no responsibility (see http://www.bhopal.com/faq.htm on its website). Even 25 years after the tragedy, it insists that there were no design flaws or any problems in the way the plant was run, and that the tragedy was an act of sabotage and the government of India knew who the saboteur was but refused to take any action; it says it never owned the plant, and that this was owned by UCIL, which was an Indian company, in which it owned just over half the stock (much is made on the website of the fact that the Indian public and financial institutions owned the rest), and that this stock was sold off to McLeod Russell in 1994. Operation wash-hands-of complete!
If the Bhopal judgment, contrary to Mr Parekh's fears, results in independent directors and CEOs/plant managers waking up to their responsibilities, that can only be a good thing.