The Role of Independent Directors In Corporate Governance

Abstract

1. In today’s fast-moving world, companies are getting bigger, more powerful, and a lot more complex. With all this power comes a need to keep things honest, fair, and open. That’s where independent directors come in. These are people who are not part of a company’s daily work and don’t have deep personal ties to it either. They’re like watchdogs, but smart, calm, and focused. Their job is to ask the right questions, keep a check on the powerful, and make sure decisions are made for the right reasons.

2. This paper looks at how these directors really work in India, what the laws say they should do, and what happens in real life. It dives into big scandals like Satyam and Enron and shows how things went wrong even when independent directors were on the board. But it also shows how good ones can make a huge difference. The paper also explores whether Indian companies are truly giving these directors the space and power they need, or if they’re just there for show. In the end, it argues that if chosen well, trained right, and given freedom, independent directors can be true heroes of corporate governance.

Keywords: Independent Directors, Corporate Governance, Board Accountability, Ethical Leadership

Introduction

3. In today’s business world, where big companies can affect not just markets but entire communities, keeping things fair, honest, and transparent is more important than ever. Corporate governance, the way a company is run and held accountable, has become a key topic across countries. At the heart of this system sits the Board of Directors. But inside that board, one role stands out: the independent director. These are people who don’t work for the company, don’t have strong personal links to its management, and don’t have anything to gain personally from its daily decisions. That’s what gives them the power to stay fair and ask tough questions.

4. Independent directors are meant to be neutral. They don’t work for either side, they make sure the rules are followed and everyone gets a fair shot. In India, their role became especially important after scandals like Satyam, where powerful people inside the company misused their control. Laws were changed^[1]. New rules were added. Still, problems remain^[2]. This paper explores what independent directors are supposed to do, how the law sees them, how companies treat them in practice, and whether they really help stop bad behavior, or just look good on paper.

Research Objective and Hypothesis

5. Independent directors, when appointed properly and allowed to function freely, play a powerful role in strengthening corporate governance. That’s the core belief this paper wants to test.

6. It assumes that independent directors, if truly independent, can check mismanagement, protect minority shareholders, and bring honesty to the boardroom. Their presence should reduce the risk of fraud. That’s the idea. But, here’s the twist, this only works if they are really independent. Not puppets. Not silent. Not tied by old friendships or favours.

7. The hypothesis also suggests that in India, the role of independent directors has been weakened by poor selection, lack of training, unclear expectations, and pressure from promoters. Simply having them on paper is not enough. Their real impact depends on how seriously companies take them.

8. So, the paper asks: Do independent directors in India genuinely help companies become more transparent, fair, and responsible, or is their role mostly symbolic? If they are empowered, do things improve? And if they’re ignored, do companies suffer?

9. This research hopes to offer clear ideas on how independent directors can be made stronger, better trained, and more useful. Because if they’re just sitting there doing nothing, what the point would be? But if they do their job right, they would be the best thing a company has. The answer to this could change how we view boardrooms. It could show that independent directors aren’t just box-ticking tools. They might be the last real line of defence between corporate greed and public trust.

Literature Review

10. Corporate governance is a concept that has drawn worldwide attention, especially after major corporate scandals like Enron in the United States and Satyam in India. These events made it clear that companies need people who can ask tough questions, stand firm, and act without bias. That’s where independent directors come in. Scholars like Dube and Pakhira (2013) have studied this role closely in India. Their work shows that while independent directors are legally required in many companies, their actual independence is often doubtful.

11. The Companies Act, 2013 , and the SEBI’s Clause 49 brought in big reforms to fix this^[3]. These laws define who an independent director is, what they should do, and how they should behave. They are supposed to be people with no close ties to the company’s promoters or management. Their job is to keep an eye on things, ask the hard questions and stop bad decisions. However, multiple studies show that in many Indian companies, independent directors don’t always speak up. They are often old friends of the promoters or people with little understanding of the company’s work.

12. The IIM Bangalore^[4] highlights that the demand for skilled and diverse independent directors in India is growing fast. It mentions that India might need double the number of trained independent directors by 2030. This shows that the position is becoming more important. But it also shows a gap, there aren’t enough good candidates who know how to do the job well.

13. Most of the literature agrees on one thing: independent directors can be powerful tools for good governance. But only if they’re chosen wisely, given real authority, and treated with respect. Otherwise, they’re just part of the furniture, nice to look at, but not very useful. The research makes it clear: laws alone are not enough. Companies need a shift in mindset. They need to start treating independent directors as real guardians of trust, not just a box to tick on a compliance checklist.

The Concept of Independent Directors

14. According to Section 149(6) of the Companies Act, 2013, an independent director is someone who is not a promoter, not related to promoters or directors, and doesn’t have any major financial relationship with the company, its affiliates, or its managers. SEBI’s Clause 49 of the Listing Agreement also lays out rules, like the requirement that one-third of board members in listed companies must be independent directors. The person must be of integrity, have experience, and be free from bias. Independence isn’t just about where you come from. It’s also about how you think and act^[5].

15. What makes a director truly “independent” isn’t just the absence of a salary or job inside the company. A truly independent director is someone who is free to think, free to act, and strong enough to speak up.

16. Globally, the push for independent directors started after major corporate disasters. In the United States, the Enron scandal (2001) shocked the world. Enron’s management lied about profits, hid debts, and fooled shareholders. Even though independent directors were on the board, they failed to see the fraud, or worse, looked the other way. Soon after, WorldCom collapsed in 2002, also due to fake accounting. These events led to the Sarbanes-Oxley Act (SOX), which made independent directors on audit committees a legal must.

17. In India, a similar wake-up call came with the Satyam scam (2009). The company’s founder admitted to inflating profits and creating fake bank balances. The board had independent directors, but they missed the red flags. After that, Indian laws were tightened. The Companies Act, 2013, along with SEBI regulations, put strong focus on defining and protecting the independence of directors.

Duties and Responsibilities of Independent Directors

18. Independent directors carry big responsibilities. They hold a fiduciary duty. That means they must act honestly, carefully, and in the best interest of the company, not in the interest of the CEO, promoters, or their friends. They have to be neutral. They are expected to follow high ethical standards, stay away from personal gain, and speak the truth.

19. They also have key oversight roles. Most independent directors sit on important committees like the Audit Committee, where they help check the truth of financial statements. They’re also part of Risk Management Committees, making sure the company isn’t walking into danger without a plan. In Nomination and Remuneration Committees, they help select and set pay for top leaders, and ensure no one is overpaid or promoted unfairly.

20. Transparency is another duty. Independent directors are supposed to help the company communicate honestly with shareholders and the public. They make sure that reports reflect the truth. They also protect minority shareholders^[6].

21. Another major role they play is in succession planning. When a leader leaves, someone needs to be ready to step up. Independent directors help ensure that the next leader is chosen fairly, not just as a favour. They also play a key role in whistleblowing and conflict resolution. If someone inside the company sees fraud or unethical behaviour, the independent director is one person they can report it to. It’s their job to listen, take action, and protect the messenger.

The Independent Director in Practice

22. Studies by institutes like IIM Bangalore, IIT Kharagpur^[7] show a mixed picture. On paper, the role of independent directors is strong. In reality, a major issue is the lack of proper disclosure. Many companies don’t even share basic information about their independent directors^[8]. For example, in a large study by IIT Kharagpur of listed Indian companies, over 84% of companies did not disclose qualifications of their independent directors. In many cases, there was also no mention of their past work experience or relationships with the company.

23. Attendance at board meetings is also patchy. In some companies, independent directors miss over half the meetings. Others attend, but don’t speak much. Remuneration is another telling factor. Most independent directors are paid only sitting fees, not stock options or commissions, which limits their motivation to invest serious time. Some sit on the boards of 9 or more companies, raising doubts about how involved they can really be.

24. A key observation is that directors behave differently in companies with high vs low market capitalisation. In wealthier firms, there is better disclosure, more professional directors, and higher participation. In smaller companies, independent directors often seem to be just ticking the box, there in name only.

Challenges Faced by Independent Directors

25. The first challenge is structural. Even though they’re called “independent,” many directors are still picked by promoters. That makes it tough to speak freely.

26. Conflicts of interest are another serious issue. Even if a director is not a promoter or employee, they may have personal ties, past deals, or future plans that influence how they vote or speak. Many don’t get full access to company data or internal reports. So even if they want to raise a red flag, they may not see the full picture.

27. There is also immense pressure from within^[9]. Some promoters and CEOs treat independent directors like guests, not watchdogs. They expect quiet agreement, not active questioning. In such settings, even smart and ethical directors can become silent.

28. Lastly, in many firms, the appointment of an independent director is just symbolic. It looks good to regulators and investors. But in truth, they’re not given power, respect, or responsibility. This is often called tokenism. It makes the director feel like a decoration on a cake, nice to have, but easy to ignore. These challenges don’t mean the role is useless. They just show that if we want independent directors to work, we must fix the system around them.

Improving the Effectiveness of Independent Directors

29. To make independent directors truly effective, there should be better screening and strict background checks to make sure the person is ethical, experienced, and truly independent. If the person has close ties to management or promoters, they simply shouldn’t be on the board^[10].

30. The nomination process needs to be transparent. Shareholders should know who is being appointed, why, and what qualifications they bring. The use of databanks of eligible directors, such as the one maintained by the Ministry of Corporate Affairs and IICA, should become the norm, not the exception. Every candidate’s background, skills, and past board performance should be open to public scrutiny.

31. Training and regulatory support are critical. Independent directors must understand financial statements, legal duties, and how to spot red flags. Regular workshops, certifications (like IIMB’s IDCP program), and support from regulatory bodies can help directors stay updated and strong.

32. Also, diversity matters. Boards with people from different genders, professions, and life experiences make better decisions. A board full of retired bureaucrats or only men from finance backgrounds will miss out on other important perspectives. Women, younger professionals, lawyers, scientists, and entrepreneurs, all bring fresh and valuable insights.

Are Indian Independent Directors Truly Independent?

33. This is the big question. And the answer? Not always. The Satyam scandal (2009) showed us how independent directors could sit on a board and still fail to notice a ₹7,000 crore fraud. The board approved shady deals, rubber-stamped fake numbers, and barely asked questions. When the truth came out, the directors resigned, but the damage was done.

34. In the IL&FS crisis (2018), a massive financial mess that nearly shook India’s credit markets, the board had multiple independent directors. Yet, loans were being rolled over without checks, losses were hidden, and the company kept borrowing beyond its means. Again, the board failed to act. Were they unaware, or just too close to speak up?^[11]

35. Here lies the deeper problem: independence vs loyalty. Some directors may meet the legal definition of “independent,” but their loyalty often lies with the promoter who gave them the position. They are hesitant to challenge, to question, or to say “no.”^[12]

36. Data from the IIT Kharagpur study shows that many independent directors don’t attend even half the board meetings. Others are serving on 10+ boards, raising doubts about how much attention they can actually give to each one. Also, information about their past relationships with the company is missing in most cases, hardly the transparency we need^[13].

Conclusion

Independent directors hold the potential to be powerful guardians of fairness, honesty, and long-term value in the corporate world, but only if they are allowed to be truly independent. Laws alone are not enough. India has the framework, but it struggles with execution. Too often, these directors are picked for their loyalty rather than their courage, and their voices are muffled in boardrooms where real power still lies with promoters. If companies begin to see independent directors not as formalities but as assets, people who can question, guide, and protect, then corporate governance in India can shift from a box-ticking exercise to a genuine force for good. But that change starts with mindset, not just law.

[1] ICSI, ‘Independent Director under Companies Act, 2013’ (ICSI, 2024)

https://www.icsi.edu/media/filer_public/78/8b/788b6cf7-7e67-4131-b883-fe4292b4c475/independent_director_ under_companies_act_2013.pdf accessed 8 July 2025.

[2] TaxClue, ‘Independent Director under Companies Act, 2013’ (TaxClue, 5 September 2022) https://blog.taxclue.in/independent-director-under-companies-act-2013/ accessed 8 July 2025.

[3] CAclubIndia, ‘The Companies Act, 2013: Provisions Relating to Independent Directors’ (CAclubIndia, 2013) https://www.caclubindia.com/articles/the-companies-act-2013-provisions-relating-to-independent-directors-183 63.asp accessed 8 July 2025.

[4] Indian Institute of Management Bangalore, ‘Independent Directors: The Pillars of Corporate Governance in India’ (IIMB Executive Education Programme, 2024) https://eep.iimb.ac.in/independent-directors-the-pillars-of-corporate-governance-in-india/ accessed 8 July 2025.

[5] Lexology, ‘Independent Directors under Section 149(6) of the Companies Act, 2013’ (Lexology, 2024) https://www.lexology.com/library/detail.aspx?g=45f2cd2e-88a0-46bf-ba56-5b404c2e4681 accessed 8 July 2025.

[6] Peak Frameworks, ‘Independent Director: Key Responsibilities and Boardroom Influence’ (Peak Frameworks, 2 April 2023) https://www.peakframeworks.com/post/independent-director accessed 8 July 2025.

[7] Indian Institute of Management Bangalore, ‘Independent Directors: The Pillars of Corporate Governance in India’ (IIMB Executive Education Programme, 2024) https://eep.iimb.ac.in/independent-directors-the-pillars-of-corporate-governance-in-india/ accessed 8 July 2025.

[8] Ideals Board, ‘The Benefits of Independent Directors’ (Ideals Board, 21 May 2024) https://idealsboard.com/the-benefits-of-independent-directors/ accessed 8 July 2025.

[9] Taxguru, ‘Independent Director under Section 149(6) of the Companies Act, 2013’ (Taxguru, 2023) https://taxguru.in/company-law/independent-director-section-1496-companies-act-2013.html accessed 8 July 2025

[10] Taxguru, ‘Procedure for Appointment of Independent Director under Companies Act, 2013’ (Taxguru, 9 October 2023) https://taxguru.in/company-law/procedure-appointment-independent-director.html accessed 8 July 2025.

[11] IJALR, ‘Role of Independent Directors in Maintaining Corporate Governance: An Indian Perspective’ (IJALR, 10 August 2023) https://ijalr.in/wp-content/uploads/2023/08/ROLE-OF-INDEPENDENT-DIRECTORS-IN-MAINTAINING-CORPORATE-GOVERNANCE-AN-INDIAN-PERSPECTIVE.pdf accessed 8 July 2025.

[12] JSA-CS, ‘Independent Directors: Are They Really Independent?’ (JSA Corporate Services, 2024) https://jsa-cs.com/image/INDEPENDENT_DIRECTORS_ARE_HEY_REALLY.pdf accessed 8 July 2025.

[13] B&B Associates LLP, ‘Independent Directors: Their Role in Corporate Decision-Making and Mitigating Corporate Liability in India’ (B&B Legal, 14 March 2023)
https://bnblegal.com/article/independent-directors-their-role-in-corporate-decision-making-and-mitigating-corpo rate-liability-in-india/ accessed 8 July 2025.

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Author Neha Mourya is currently pursuing an LL.M. at SAGE University, Indore.