The issue of Independent Directors is back in focus, thanks to the “ownership row” in a corporate giant in the country and a renewed stress on Corporate Governance across the world.
This article analyses the traits of Independent Directors in the present times of stiff competition.
Who Is An Independent Director?
As per sub-section 6 of Section 149 of THE COMPANIES ACT, 2013 Act, Independent Director means a director other than a managing director or whole time director or a nominee director,
a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
b) (i) Who is or was not a promoter of the company,
(ii) Who is not related to promoters or directors in the company
c) Who has or had no pecuniary relationship with the company
d) None of whose relative has or had pecuniary relationship or transaction with the company.
e) Who, neither himself nor any of his relative:
(i) Holds or has held the position of a key managerial personnel
(ii) Is or has been an employee or proprietor or a partner, in any of the three financial years proceeding.
(iii) Holds together with his relative two per cent or more of the total voting power of the company; or
(iv) Is a Chief Executive or director, of any non-profit organization, or who possesses such other qualifications as may be prescribed.
Why have Independent Directors on the Board?
There are several distinct benefits that an independent board of directors can bring to a company, ranging from long-term survival to improved internal controls.
Independent directors in the board can:
- Counterbalance management weaknesses in a company.
- Ensure legal and ethical behaviour at the company, while strengthening accounting controls.
- Extend the “reach” of a company through contacts, expertise, and access to debt and equity capital.
- Be a source of well-conceived, binding, long-term decisions for a company.
- Help a company survive, grow, and prosper over time through improved succession planning through membership in the nomination committee etc.
What is Corporate Governance???
Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”
Corporate Governance & Board of Directors:
The 21st century is witnessing the role and activity of the corporate boards being redefined by many forces. International financial investors, media focus and corporate governance initiatives are the main forces that are responsible for affecting these changes.
“We now do not need new legislations to improve corporate governance. What is required now is proper implementation with a view to bring about overall enhancement of the corporate values.”
Composition & Structure of Board of Directors under CORPORATE GOVERNANCE:
All Corporate Governance regulations provide the basis on the composition and structure of the Board. I am of the opinion that this is the most important aspect for any Board’s functioning.
It is the means by which power is distributed so that the objectivity in decision- making of the Board is achieved and that no single party can dominate over such decision-making in the company. The core of this requirement is that Board should include a sufficient number of non- executive members with appropriate competencies, who are independent.
Independent directors and corporate governance:
The concept of the institution of Independent Director’s is simple. They are expected to be independent from the management and act as the trustees of shareholders. This implies that they are obligated to be fully aware of and question the conduct of organizations on relevant issues.
The role of an Independent Director is considered to be of a great significance. The guidelines, role and functions and duties and etc. are broadly set out in a code described in Schedule IV of the Act, 2013.
The code lays down certain critical functions like safeguarding the interest of all stakeholders, particularly the minority holders, harmonizing the conflicting interest of the stakeholders, analysing the performance of management, mediating in situations like conflict between management and the shareholder’s interest etc.
The code also lays down certain important duties like keeping themselves updated about the company and the external environment in which it operates;
- Not disclosing important and confidential information of the company unless approved by the board or required by law;
- Actively participating in committees of the board in which they are chairperson or members;
- Keeping themselves update and undertaking appropriate induction and refreshing their knowledge, skills and familiarity with the company, regularly attend the general meetings of the company and etc.
Role of the Lead Independent Director:
- Identify the most critical issues for the board to deal with
- Assist the board in achieving consensus on important issues
- Play the role of a facilitator outside the board room especially on contentious issues
- Work with the CEO to prioritise issues, set the agenda and enable it to focus on substantive issues
- Ensure that board conversations do not veer in the direction of certain unwanted topics / individual preferences
- Provide candid feedback to CEO, CFO post an executive session.
Role towards shareholders and stakeholders:
The shareholders, especially the minority shareholders, look to independent directors providing transparency in respect of the disclosures in the working of the company as well as providing balance towards resolving conflict areas.
- In evaluating the board’s or management decisions in respect of employees, creditors and other sup- pliers of major service providers, independent directors have a significant role in protecting the stake holders interests.
- One of the mandatory requirements of audit committee is to look into the reasons for default in payments to deposit holders, debentures, non-payment of declared dividend and creditors.
- Further they are required to review the functioning of the “Whistle Blower mechanism” and related party transactions. These, essentially, safeguard the interests of the stakeholders.
Role towards the Board: As members of Board, their role is similar to any other director; independent directors primarily provide inputs to all key decisions, such as strategies, performance evaluation and risk evaluation, affecting the company.
- The single most important role that independent directors play directly in relation to the board is the objective view that they bring in while evaluating the board and the management decisions, creating a balance in the interest of the shareholders.
- An independent director should ensure that the Board addresses areas of concern on the running of the company and that these are recorded in the minutes if not resolved.
- While the legal duties and objectives are the same as executive directors, the time devoted by independent non-executive directors to the company’s affairs is significantly less and therefore the degree of care, skill and diligence is lower than that expected from executive directors.
- It’s the responsibility of the Independent Director to Compliance with the Company’s Code of Conduct.
Role in Committee Membership:
The companies act, 2013 most corporate governance requirements and provide that “independent directors” shall necessarily be appointed to key committees such as
- Investor relations, and
- Perhaps the most important, on the audit committee.
- Infosys Case:
Infosys Technologies has appointed a Lead Independent Director representing and acting as a spokesperson for independent directors group. The role of the Lead Independent Director as per the company’s annual report is as given below:
- Presiding over all executive sessions of the board’s independent directors
- Working closely with the Chairman, co-Chairman and CEO to finalize the information flow, meeting agendas and meeting schedules
- Liaising between Chairman, co-Chairman, CEO and independent directors groups
- Taking the lead role, along with Chairman and co- Chairman, in the board evaluation process.
Independent director in Audit Committee and its importance in the Indian Context:
The Act, 2013 has also emphasized on the appointment of an Independent Director in the Audit committee which shall comprise of minimum three directors, Independent Director’s should form a majority.
In the same way, the Nomination and Remuneration Committees which shall consist of three or more non-executive directors, Independent Director’s should not be less than half of the total number of members.
RESPONSIBILITIES OF INDEPENDENT DIRECTORS for a good CORPORATE GOVERNANCE:
To execute their role, independent directors, have similar responsibilities to those of other directors. The fiduciary duties of care, diligence and acting in good faith apply equally to independent directors as to other directors. In view of faith imposed on them by various agencies they are more bound to execute their functions with impartiality.
It is necessary for the independent directors to:
- Prepare themselves thoroughly for the meeting.
- Be objective in forming sound decisions relating to the company and its business.
- Be open minded, free and frank in expressing their opinions and at the same be willing to engage in meaningful debates.
- Be committed to decisions made as a Board.
- Be informed on laws and regulations influencing their functioning as directors.
- Utilize the expertise they possess to the good advantage of the company..
Responsibility of independent directors for the prevention and detection of fraud:
The role of Independent Director in fraud prevention and detection has come under the direct scanner of regulators, members and other stakeholders due to the recent exposure of high-profile instances of fraud in India. In the last few months, we can clearly see IDs taking direct interest in reviewing the fraud risk management framework put in place by their organizations to mitigate the risk of fraud.
The report lists 10 questions every director should ask to ensure compliance with governance:
- Do we set and communicate the right “tone at the top”?
- Do we effectively assess our corruption risk?
- Do we have effective standards, policies and processes to address these risks?
- Do we adequately communicate and train directors on our anti-bribery and corruption policies and processes?
- How do we know that our training is effective?
- What incentives do we provide for compliance and penalties for non-compliance?
- How do we monitor and audit to detect improper conduct?
- Do our compliance officers have adequate clout, resources and independence?
- How do we review the effectiveness of our compliance program?
- When we find a problem, do we ensure that an independent and thorough investigation is carried out?
How can Independent Directors protect themselves against liability due to fraud, bribery and corruption?
- The Independent Director can play the crucial role of bringing objectivity to the decisions made by the board of directors by playing a supervisory role. While they need not take part in the company’s day-to-day affairs or decision making, they should ask the right questions at the right time regarding the board’s decisions.
- Raising the appropriate red flags at the right time would help them in avoiding the occurrence of unwanted situations and their consequences to a great extent.
LIABILITY of an Independent Director:
The Act, 2013, has sought to balance the wide nature of the obligations, functions and duties imposed on an Independent Director.
The Act, 2013, restricts and limits the liability of Independent Director’s to the matters which are directly relatable to them.
- Section 149 (12) limits the liability of an Independent Director “only in respect of acts of omission or commission by a company which had occurred with his knowledge, attributable through board processes, and with his consent or where he had not acted diligently”.
Guidance for Independent Directors:
- Take care of the Reputation of company
- Have Capability to meet the requirements and expectations
- Demonstrate independence
- See Whether the company has adequate controls and whether they can be relied upon
- Have Ability to resist pressure
- Have Knowledge on current developments
- Be Aware and abide by corporate code of conduct
- Seek expert help
- Prepare in advance for board meetings
- Maintain confidentiality
The new concept of having Independent Director is a welcome step for corporate governance in India. The Act, 2013 has conferred greater empowerment upon Independent Director’s to ensure that the management & affairs of a company is being run fairly and smoothly. But, at the same time, greater accountability has also been placed upon them. The Act, 2013 empowers the Independent Director’s to have a definite ‘say’ in the management of a company, which would thereby immensely strengthen the corporate governance.
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