ROLE OF INDEPENDENT DIRECTORS IN A COMPANY: A CONSCIOUS KEEPER FOR CORPORATE GOVERNANCE? By - Nishtha Anand

ROLE OF INDEPENDENT DIRECTORS IN A COMPANY: A CONSCIOUS KEEPER FOR CORPORATE GOVERNANCE?

Authored By - Nishtha Anand

ABSTRACT

The role of independent directors in a company is to provide objective and unbiased oversight and guidance to the board of directors and management team. Independent directors are appointed based on their expertise, experience, and independence from the company's management and shareholders. They are expected to bring an independent perspective to the decision-making process and act in the best interests of the company and its stakeholders.

The primary responsibilities of independent directors include monitoring the performance of the company, reviewing and approving financial statements, and providing guidance on strategic and operational matters. They are also responsible for ensuring that the company adheres to legal and regulatory requirements and ethical standards. In addition, independent directors serve as a liaison between the board of directors and shareholders, ensuring that the company is accountable to its stakeholders.

Overall, the role of independent directors is critical in ensuring good corporate governance and building trust with stakeholders. They play a key role in promoting transparency, accountability, and ethical behavior, which are essential for the long-term success of a company.

Keywords: Corporate Governance, Board of Directors, Independent Director, Mismanagement, Stakeholders, Company

1* Nishtha Anand, 3rd Year Student, B.A. LL.B.(Hons.), Amity Law School, Lucknow, Amity University.

INTRODUCTION AND BACKGROUND

Independent directors play a critical role in the governance of a company. They are non-executive directors who do not have any material or pecuniary relationships with the company or its management. They are appointed to the board of directors to provide an objective and independent view on the company's performance, strategic direction, and risk management.

The concept of independent directors gained prominence in the wake of corporate scandals in the late 1990s and early 2000s, which exposed the failures of corporate governance systems in many companies. The Enron scandal, for example, led to the bankruptcy of the company and the dissolution of its accounting firm, Arthur Andersen. The WorldCom scandal also exposed serious accounting irregularities and led to the company's bankruptcy.

In response to these scandals, regulators and investors called for greater accountability and transparency in corporate governance. One of the key recommendations was the appointment of independent directors to the board of directors of listed companies. This was aimed at reducing conflicts of interest and improving the oversight of company management.

Independent directors are expected to bring a range of skills and expertise to the board. They are typically selected for their experience in areas such as finance, strategy, risk management, and corporate governance. They are also expected to act as a check on the management team and to ensure that the interests of all stakeholders, including shareholders, are taken into account.

Overall, the role of independent directors is to provide an objective and independent view on the performance and direction of the company. They are expected to act in the best interests of the company and its stakeholders and to ensure that the company is managed in an ethical and responsible manner.

FRAMEWORK OF THE CONCEPT OF INDEPENDENT DIRECOTRS

Why have independent directors on the board?

Independent directors play an essential role in ensuring good corporate governance by providing an objective and unbiased perspective to the decision-making process of a company's board of directors. Here are some reasons why companies should have independent directors on their board:

1. Improved decision-making: Independent directors are appointed based on their expertise, knowledge, and experience. They bring a fresh perspective to the boardroom and offer valuable insights and advice that can improve the quality of the board's decision-making.
2. Increased accountability: Independent directors are not affiliated with the company, its management, or its shareholders. As a result, they are less likely to be influenced by personal interests and are better positioned to hold management accountable for their actions and decisions.
3. Better risk management: Independent directors can provide an objective assessment of the company's risk management practices and help to identify potential risks and opportunities that may not be apparent to management.
4. Enhanced transparency: Independent directors can help to promote transparency in the company's operations and ensure that the board of directors is acting in the best interests of all stakeholders.
5. Improved reputation: Having independent directors on the board can help to enhance the company's reputation by demonstrating a commitment to good corporate governance and responsible business practices.

Overall, the presence of independent directors on a company's board can help to improve the quality of decision-making, promote transparency and accountability, and enhance the company's reputation.

This research paper is structured as follows. First part will lay out the relevant legal issues. The second part will construct analysis of the concept and the concomitant issues. The third part provides an examination of post- Satyam reforms and judicial responses along with illustration of classic and up to the minute cases. Lastly, the fourth part will be the conclusion.

LEGAL ISSUES AND QUESTIONS RAISED

1. What are the key responsibilities of independent directors in a company?
2. How do independent directors ensure that the company operates in the best interests of its stakeholders?
3. What is the process for selecting independent directors, and what qualities should they possess?
4. How do independent directors interact with other members of the board of directors and the company's management team?
5. What are the potential conflicts of interest that independent directors may face, and how do they manage these conflicts?
6. How can independent directors help to improve a company's corporate governance practices?
7. What is the role of independent directors in overseeing a company's risk management practices?
8. How can independent directors ensure that the company complies with all relevant laws and regulations?
9. What are some examples of situations where independent directors have played a key role in ensuring good corporate governance?
10. How can independent directors help to promote transparency, accountability, and integrity in a company's operations?

ANALYSIS

Who is an independent director?

An independent director is a member of a company's board of directors who does not have any direct or indirect financial or other material relationships with the company, its promoters, or its management. Independent directors are appointed based on their expertise, knowledge, and experience, and they are expected to bring an objective and unbiased perspective to the company's decision-making process.

The term "independent" refers to the fact that these directors are not affiliated with the company in any way that could compromise their ability to act in the best interests of the company and its stakeholders. This independence is important for ensuring that the board of directors makes decisions that are free from any conflicts of interest and that the company is well-governed.

Top of Form

Provisions under Companies Act, 2013

Section 149(4) of the Companies Act, 2013 provides for having the requirement to have independent directors on board. Section 149(6) lays down, that at least one-third out of the total number of directors to be independent directors for every listed public company. 8

Now, the problem lies with the fact that it does not addresses the most debated issue of CEO duality.

Nonetheless, it is to be noted that according to Regulation 17 of SEBI (Listing Obligations and Disclosure Requirements) it is mandated that the board should have a judicious mix of executive and non-executive directors wherein fifty percent of it shall comprise of the latter with the requirement of at least one woman director on the board.

However, if the chairperson of Board of Directors is a non-executive director, then in that situation it is required that the board shall comprise of independent directors. Further, if the an executive director is the Chairperson, then in that scenario it is mandated that half of board shall comprise of independent directors.

Also, special attention should be drawn at the fact that if the non-executive chairperson is related a promoter or to any person having a managerial post in the Board of Directors then it is required that at least half of the Board of Directors shall be independent directors.9

Furthermore, Mr. Naresh Chandra's 2009 report of the CII task force on corporate governance has taken up this issue of CEO duality and has sternly recommended that the office of the Chairman should be separate from that of CEO thereby eradicating the duality aspect completely

Role of independent directors

The role of an independent director in a company is to provide an objective and independent perspective to the board of directors. Independent directors are responsible for ensuring that the board of directors operates in the best interests of the company and its stakeholders. Here are some of the key roles and responsibilities of independent directors:

1. Provide an independent perspective: Independent directors are expected to act independently of any personal or business relationships with the company's management or shareholders. They bring a fresh perspective to the board of directors' deliberations and decision-making process.
2. Monitor the performance of the management: Independent directors are responsible for monitoring the performance of the company's management and ensuring that they are acting in the best interests of the company and its stakeholders.
3. Provide strategic guidance: Independent directors bring a wealth of experience and knowledge to the board of directors, and they are expected to provide strategic guidance to the management team.
4. Ensure compliance with regulations: Independent directors are responsible for ensuring that the company complies with all relevant laws and regulations.
5. Oversee risk management practices: Independent directors are responsible for overseeing the company's risk management practices and ensuring that appropriate controls and systems are in place to manage and mitigate risks.
6. Enhance corporate governance practices: Independent directors play a critical role in enhancing the company's corporate governance practices. They ensure that there is transparency, accountability, and integrity in all of the company's operations.

1. Represent the interests of stakeholders: Independent directors are expected to represent the interests of all stakeholders, including shareholders, employees, customers, and the broader community.

Overall, independent directors play a crucial role in ensuring that a company is well-governed and operates in the best interests of all its stakeholders. They bring a level of expertise, objectivity, and independence to the board of directors, which is essential for good corporate governance.

Correlation between Independent Director and Corporate Governance

Independent directors play a crucial role in corporate governance, as they are responsible for ensuring that the company is well-governed and operates in the best interests of all its stakeholders. Corporate governance refers to the system of rules, practices, and processes by which a company is directed and controlled. It encompasses the relationships between the company's management, board of directors, shareholders, and other stakeholders.

Here are some ways in which independent directors are closely correlated with corporate governance:

1. Oversight of management: Independent directors are responsible for overseeing the company's management and ensuring that they are acting in the best interests of the company and its stakeholders. They provide an independent perspective and are not influenced by personal interests, ensuring that the management is held accountable for their actions.
2. Enhancing transparency and accountability: Independent directors play a critical role in enhancing the company's transparency and accountability. They ensure that there is transparency in the company's operations and that the management is held accountable for their actions.
3. Risk management: Independent directors are responsible for overseeing the company's risk management practices and ensuring that appropriate controls and systems are in place to manage and mitigate risks. This ensures that the company is well-prepared for potential risks and is able to handle them effectively.
4. Representing stakeholders' interests: Independent directors are expected to represent the interests of all stakeholders, including shareholders, employees, customers, and the broader community. This ensures that the company's decisions are made in the best interests of all stakeholders and not just the interests of the management or shareholders.
5. Enhancing corporate governance practices: Independent directors play a critical role in enhancing the company's corporate governance practices. They ensure that there is transparency, accountability, and integrity in all of the company's operations. They also ensure that the company adheres to relevant laws, regulations, and ethical standards.

In summary, independent directors and corporate governance are closely correlated, as independent directors play a critical role in ensuring that the company is well-governed and operates in the best interests of all its stakeholders. They provide oversight of management, enhance transparency and accountability, oversee risk management practices, represent stakeholders' interests, and enhance corporate governance practices.

CORPORATE SCAMS: TATA SONS & SATYAM COMPUTER'S CASE STUDY

Can a director really be independent?

In the Tata Sons case, there were concerns about the independence of the board of directors, particularly with regards to the role of the independent directors. The board was criticized for not providing effective oversight and allowing the management to take certain decisions without proper due diligence. However, it is worth noting that independent directors did play a role in addressing the concerns and restoring the credibility of the board.

In the Satyam Computer case, the company's board was accused of collusion with the management to commit financial fraud. The independent directors were found to be complicit in the fraud and were held accountable for their actions.

These cases highlight the challenges of ensuring the independence of directors, particularly in situations where there are complex power dynamics at play. It is important to note that the independence of directors is not just about their formal qualifications, but also their ability to act independently and with integrity.

In general, it is important for companies to have robust processes in place for selecting and appointing independent directors, and to ensure that they are provided with adequate support and resources to carry out their duties effectively. Companies should also have effective mechanisms for monitoring and evaluating the performance of the board of directors, including the independent directors.

True Independence of Independent Director

The true independence of independent directors has been a matter of debate in recent years, particularly in the wake of high-profile corporate governance scandals such as the Tata Sons and Satyam Computer cases.

In the Tata Sons case, independent directors were accused of failing to exercise due diligence in their oversight of the company's affairs, particularly with regards to the removal of the former chairman. The independent directors were criticized for not challenging the actions of the company's board, which was dominated by the Tata family, and for not taking sufficient steps to protect the interests of minority shareholders.

In the Satyam Computer case, independent directors were found to have colluded with the company's management in a massive accounting fraud, which led to the company's collapse. The independent directors were accused of failing to exercise their fiduciary duties and acting in the interests of the company's management rather than its shareholders.

These cases highlight the challenges of ensuring the true independence of independent directors. While independent directors are supposed to act in the best interests of the company and its stakeholders, they may be subject to various pressures and influences that can compromise their independence. These pressures may come from the company's management, its shareholders, or other external factors.

To ensure the true independence of independent directors, it is important to have robust systems and processes in place that promote transparency, accountability, and integrity in the company's operations. Independent directors should be selected based on their expertise, experience, and track record of independence, and they should be provided with adequate resources and support to carry out their responsibilities effectively. In addition, there should be regular evaluations of independent directors' performance, and mechanisms in place to address any conflicts of interest or other issues that may arise.

JUDICIAL RESPONSES TO ROLE AND LIABILITY OF INDEPENDENT DIRECTORS

Over the years, the judiciary has responded to the role and liability of independent directors in various ways. Here are some examples of judicial responses:

1. Role of independent directors: The judiciary has emphasized the importance of independent directors in ensuring good corporate governance. In the landmark case of Satyam Computers Services Ltd. v. Union of India, the Supreme Court of India held that independent directors play a crucial role in ensuring that the company is well-governed and operates in the best interests of its stakeholders. The court also held that independent directors should provide an independent perspective and act as a check on the management's actions.
2. Liability of independent directors: The judiciary has also clarified the liability of independent directors in certain situations. In the case of SEBI v. Price Waterhouse Coopers, the Securities and Exchange Board of India (SEBI) held that independent directors cannot escape liability for their actions or inactions that result in the company's fraud or financial irregularities. The SEBI also held that independent directors are expected to exercise their independent judgment and ensure that the management is acting in the best interests of the company and its stakeholders.
3. Duty of care and diligence: The judiciary has emphasized the duty of care and diligence that independent directors owe to the company and its stakeholders. In the case of In Re: Satyam Computer Services Ltd., the Securities Appellate Tribunal (SAT) held that independent directors should have exercised their duties with due diligence and care and should have questioned the management's decisions and actions.
4. Liability for non-compliance: The judiciary has held that independent directors can be held liable for non-compliance with laws and regulations. In the case of SEBI v. Sahara India Real Estate Corporation Ltd., the Supreme Court of India held that independent directors cannot evade their responsibility for the company's non-compliance with laws and regulations.

In summary, the judiciary has responded to the role and liability of independent directors by emphasizing their importance in ensuring good corporate governance, clarifying their liability in certain situations, emphasizing their duty of care and diligence, and holding them liable for non-compliance with laws and regulations.

SUGGESTIONS AND RECOMMENDATIONS

Here are some suggestions and recommendations for the role of independent directors:

1. Enhance their independence: Independent directors should be truly independent and free from any undue influence from the management or other stakeholders. This can be achieved by ensuring that they are not related to the company's management or its promoters, and that they do not have any business or financial relationship with the company that may compromise their independence.
2. Provide effective oversight: Independent directors should provide effective oversight of the company's management and operations. This can be achieved by regularly reviewing the company's financial and operational performance, monitoring risk management practices, and ensuring that the company complies with relevant laws and regulations.
3. Foster a culture of transparency and accountability: Independent directors should foster a culture of transparency and accountability within the company. This can be achieved by promoting open communication, ensuring that the company's operations and decision-making processes are transparent, and holding the management accountable for their actions.
4. Promote ethical practices: Independent directors should promote ethical practices within the company. This can be achieved by ensuring that the company's values and principles are aligned with ethical standards, and by providing guidance on ethical issues and dilemmas.
5. Act as a bridge between the company and stakeholders: Independent directors should act as a bridge between the company and its stakeholders. This can be achieved by ensuring that the interests of all stakeholders are represented and by facilitating communication between the company and its stakeholders.
6. Continuously update their knowledge and skills: Independent directors should continuously update their knowledge and skills to keep pace with the changing business environment and regulatory requirements. This can be achieved by attending training programs, workshops, and conferences, and by staying up-to-date with the latest developments in corporate governance and related fields.

1. 1. Reliable and robust database of persons eligible and available for the post of independent director is the need of the hour for the corporates to make a right pick for the concerned post with right skills and aptitude. Therefore, development of such a database should be promoted.

CONCLUSION

In conclusion, independent directors play a crucial role in ensuring good corporate governance by providing an independent perspective and acting as a check on the management's actions. The judiciary has clarified their role and liability in various situations, emphasizing their duty of care and diligence, and holding them accountable for non-compliance with laws and regulations. To fulfill their role effectively, independent directors should enhance their independence, provide effective oversight, foster a culture of transparency and accountability, promote ethical practices, act as a bridge between the company and stakeholders, and continuously update their knowledge and skills. By doing so, independent directors can contribute to the long-term success and sustainability of the company and its stakeholders.

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INTERNET DOCUMENT

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