Role of Independent Director: In Era of Corporate Governance

Introduction

Corporate governance generally refers to how organisations are directed, managed, controlled, and held responsible to its shareholders. Over the course of the late 1980s and early 1990s, unethical business activities and dubious corporate policies plagued the global corporate sector, giving rise to the topic of corporate governance. There has been a lot of discussion about corporate governance and the role of company directors, particularly independent directors (henceforth referred to as IDs), since major business scandals began to surface in India. India is a popular location for investments, thus in order to attract the largest investment ever, we need to strengthen the governance standards. A non-executive member of a company’s board of directors who provides independence and impartiality to the decision-making process is known as an independent director. Beginning with the Desirable Corporate Governance Code in 1998 and continuing through Chapter 11 of the Companies Act of 2013, the idea of the independent director has been welcomed nearly universally.

Why There Is Need of Independent Director in India[1]

Governance has arisen as a major answer to governance challenges in a public organisation, and ID arose with the concept of corporate governance. It was believed that the IDs would operate independently and that as such, the IDs would be able to reflect the greater interests of the shareholders, including the minority shareholder. According to the regulations, management cannot act unfairly to any of the shareholders. Even yet, the majority shareholder persisted in acting against the best interests of the business in order to further their own interests. The majority shareholder’s best interests are often served by the promoters who possess a controlling stake in the company because they are in charge of choosing the directors and board members.

WHO CAN BECAME INDEPENDENT DIRECTOR

In order to improve governance, the Cadbury Committee of 1992 mandated the employment of IDs. In addition to stating that the nominee must be a person of integrity and unity and have the necessary experience and skills, the committee also lists “the positive attributes of independence.” None else than the board may verify the aforementioned eligibility requirements, and the aforementioned qualification is contingent upon their judgement. According to rule 5 of the Companies (Appointment of Directors) Rules, 2014, an ID must have relevant abilities, knowledge, and experience in at least one of his main areas of expertise, which may include law, management, marketing, sales, and other disciplines linked to the firm. Additionally, if a small shareholder director declares their independence in accordance with Section 149(7)[2] and is qualified to be appointed as an independent director under Section 149(6)[3], they will be regarded as independent directors.

DUTIES OF INDEPENDENT DIRECTOR IN CORPORATE GOVERNANCE[4]

The director bears the responsibility of carrying out his tasks with appropriate care and competence, as outlined by Charles Worth. A director has an obligation to handle their office with the same care and attention to detail as a judicious businessman would handle his personal affairs.

[Image Sources: Shutterstock]

Examine management’s success in reaching agreed-upon goals and objectives, as well as the performance reporting process and ensure that the systems of risk management and financial controls are strong and defendable, and that the accuracy of the financial data.

The notion that independent directors are better suited to oversee related party transactions, which, even if they are legal, might nonetheless reduce shareholder value if done improperly, is another justification for their inclusion.

 Independent director should not did unethical behaviour, or fraud, or violations of the company’s ethics policy or code of conduct; it should acting in their official capacity, support the legitimate interests of the business, its shareholders, and its employees; and not disclosing confidential information, such as trade secrets, technologies, plans for advertising and sales promotion, or price-sensitive information unless the Board specifically approves of such disclosure or as required by law.

How Independent Directors Can Remain Independent[5]

The selection of independent directors needs to be done in a way that is more impartial, transparent, and professional. Currently, elections by majority are used to nominate and remove independent directors. Since the controlling owners may remove them from their position at any time, they may be more likely to follow the wishes of the larger shareholders. The goal of appointing independent directors would be defeated if this really limited their effectiveness and hampered their “independence.”

The introduction of proportionate or cumulative voting, which is allowed in China and the Philippines, is thought to offer alternatives to the current director selection procedure and strengthen protection for minority shareholders in India’s corporate governance laws.

In order to prepare independent directors for their roles, responsibilities, expectations from different stakeholders, internal controls, risk management systems, and business models, NISM may design a separate course for 14 independent directors. Independent directors may be required to pass this course before being appointed. In addition to offering introduction courses, NISM could provide independent directors with training or review sessions.

To recruit qualified personnel to the Board, risk-return parity must be implemented for the position of “independent directors”. Currently, there is little clarification regarding independent directors’ responsibility. Given the risk and responsibility of the position, independent directors’ compensation—which often consists of merely sitting fees—is deemed insufficient.

It is suggested that directors be required to submit performance evaluations, with the independent director’s report to be evaluated based on his attendance and participation in board and committee meetings. The nomination committee will then consider the evaluation report before deciding the independent director’s reappointment.

Conclusion

It should be noted that the Companies Act of 1956 does include provisions for non-executive directors, including their functions, responsibilities, compensation, and so on, all of which are quite similar to those for independent directors. A non-executive director’s primary function is to give impartial criticism and recommendations to the board of directors, which can be described as a creative contribution. Although it was anticipated that an Independent Director’s role under the New Act would be that of a “Super Watchdog,” one in which they would have to make sure that everyone involved in day-to-day management, including all Board Directors, was acting in the best interests of stakeholders, minority shareholders, employees, clients, and the general public.

Author: Yagya Agarwal, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or   IP & Legal Filing.

[1] Kumar, Shashank. The Role of Independent Directors in Corporate Governance – a Critical Study. 1 July 2021 Available at http://gnanaganga.inflibnet.ac.in:8080/jspui/handle/123456789/60 .

[2] Company Act, 1956.

[3] Ibid.

[4] Pandey, Anubhav. “Duties of Directors Under the Indian Companies Act, 2013 – iPleaders.” iPleaders, 10 Oct. 2019, https://blog.ipleaders.in/directors-duties/.

[5] SEBI Consultative Paper on Review of Corporate Governance Norms in India, 2013.