Understanding responsibilities and importance of independent director in a company

Article explains Importance of independence of independent directors, Recognition And Importance Of Independent Director Under Company Law, Role of Independent Director in CSR Committee, Role of Independent Director in Board meeting, Role of Independent Directors in this Meeting, Role of Independent Director in Audit Committee, Role of Independent Director in Nomination and Remuneration Committee and Duties of independent director for prevention of fraud.

Introduction

An  Independent Director is a Non-Executive Director who does not have a material or pecuniary relationship with company, except sitting fees, but is one who is enriched with appropriate balance of skill, experience, independence and knowledge of the corporate and assigned with the task to monitor and guide the Board in risk management, thereby improving corporate credibility and accountability and also play a significant role by acting as a watchdog in various committees constituted by the company to ensure good Corporate Governance and enhancing the corporate or company image in the business world.

1. Importance of independence of independent directors

Independence of independent directors assist in connecting the management’s interests with that of shareholders’ and improve the quality of judgement in decision-making. Also since independent directors are individual unknown to the management, an objective analysis of company performance will ensure good corporate conduct and governance practices across the globe. Evolution of corporate scandals like Satyam gave rise to the introduction of the concept of Independent Director and mandatory appointments in certain companies under the Companies Act, 2013. The importance and the need for Independent Directors has arisen with each and every corporate scandal and financial crisis across the globe.

Section 149(7) of the Companies Act, 2013, ask for the submission of a self-declaration by the Independent Director to meet the criteria of independence.

As per the Section 149(7) “Every Independent Director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the circumstances which may affect his status as an Independent Director, give a declaration that he meets the criteria of independence.”

2. Recognition And Importance Of Independent Director Under Company Law

♦ Corporate Social Responsibility

“Corporate Social Responsibility is the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.”

As per Section 135(1) of the Companies Act, 2013, Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during the immediately preceding financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an independent director.

Where there is no requirement of Independent Director, committee is permitted to function with two and more directors.

3. Role of Independent Director in CSR Committee:

1. To recommend the CSR Policy to the board;

2. To recommend the CSR activities and programs as per Schedule VII;

3. To specify the CSR expenditure;

4. To monitor the CSR Policy of the Company from time to time.

♦ Board meeting

 As per Section 149(4) of the Companies Act, 2013, Every listed public company shall have at least one-third of the total number of directors as independent directors and the following class or classes of companies shall have at least two directors as independent directors –

(i) the Public Companies having paid up share capital of ten crore rupees or more; or

(ii) the Public Companies having turnover of one hundred crore rupees or more; or

(iii) the Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding fifty crore rupees

Section 173(3) of the Companies Act, 2013, states that the Company can call board meeting by giving not less than 7 days’ notice but if the meeting of the Board called at shorter notice to transact urgent business than that subject to condition that at least one independent director, if any, shall be present at the meeting and provided that in case of absence of independent directors from such a meeting of the Board, decisions taken at such a meeting shall be circulated to all the directors and shall be final only on ratification thereof by at least one independent director, if any.

4. Role of Independent Director in Board meeting:

1. Should give Independent judgement on any matter of the Board;

2. Should prevent the management from taking decisions that is likely to affect the interest of the shareholders as large;

3. To ensure that there should not any unethical behavior or fraudulent practices adopted by the board;

4. To ensure that there should not violation of any company’s policy.

♦ Separate meetings

The independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management.

5. Role of Independent Directors in this Meeting:

1. To review the performance of non-independent directors and the Board as a whole;

2. To review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors;

3. To assess the quality, quantity and timeliness of flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

♦ Audit committee

Section 177(2) of the Companies Act, 2013 specify that the Audit Committee shall consist of a minimum of 3 directors with Independent directors forming a majority.

6. Role of Independent Director in Audit Committee:

1. To recommend for appointment, remuneration and terms of appointment of auditors of the Company;

2. To review and monitor the auditor’s independence and performance, and effectiveness of audit process;

3. To examination of the financial statement and the auditors’ report;

4. To review annual financial statements with reference of accounting policies and practices.

♦ Nomination and remuneration committee

According to Section 178(1) of the Companies Act, 2013 and rules made thereunder, every listed public Company and certain other Companies shall constitute Nomination and Remuneration Committee consisting of 3 or more non-executive directors out of which not less than one-half shall be Independent Directors.

7. Role of Independent Director in Nomination and Remuneration Committee:

1. Determine appropriate levels of remuneration of executive directors, key managerial personnel and senior management and have a prime role in appointing and where necessary recommend removal of executive directors, key managerial personnel and senior management;

2. Formulation of Succession plan to ensure corporate governance, stability and sustainability of the business;

3. To ensure that appointment and succession planning on merit basis.

8. Duties of independent director for prevention of fraud

Independent Director should:

1. Ascertain and ensure that the company has an adequate and functional vigil mechanism and the interests of a person who uses such mechanism are not affected on account of such use;

2. Report about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy;

3. Act within his authority, assist in protecting the legitimate interests of the company, shareholders and its employees;

4. Not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law.

9. Conclusion

Thus, Independent Director help in bringing Independent judgement and act as a bridge between management and shareholders by encouraging the principles of Corporate Governance through providing transparency, accountability and disclosures in the working of the Company and assist the Company in implementing the best corporate governance practices.

Disclaimer:

The information given in this document has been made on the basis of the provisions stated in the Companies Act, 2013. It is based on the analysis and interpretation of applicable laws as on date. The information in this document is for general informational purposes only and is not a legal advice or a legal opinion. You should seek the advice of legal counsel of your choice before acting upon any of the information in this document. Under no circumstances whatsoever, we are not responsible for any loss, claim, liability, damage(s) resulting from the use, omission or inability to use the information provided in the document.