INDEPENDENT DIRECTORS: THEIR ROLES AND RESPONSIBILITIES IN CORPORATE GOVERNANCE
This Article has been written by Alina Sheikh, a Law Student from the Devi Ahilya Vishwavidyalaya University, Indore.
ABSTRACT
Independent directors act as a pivotal asset in building up the organization by providing their unbiased oversight and strategic views to the board of directors. Their primary duty is to protect interest of investors in the company, foster alliance and maintain a standard of financial holding of the company without any personal gain or malpractice. Independent director aims to mitigate conflict of interest, encourage ethical conduct and bring more transparency and accountability in the working of the firm. Over the last decade the roles and responsibilities of independent directors have seen a tremendous change, companies have started to understand the value and expertise they add to the firm. Although it is little hard for them to know the exact journal and ledger of companies delivered by executive director, independent directors put in time for research for figuring out sources and actual holdings of company. Thus, the author of the article has tried to delve into the outreach and intricacies of independent director.
KEYWORDS: independent director, duty, challenges, accountability.
INTRODUCTION
As Countries require proper governing structure like India has federal system which delegates work, decentralizes it and have bodies to keep a check over one another. Likewise, with evolving time, corporate governance has garnered considerable recognition to the composition of directors of the company, as with this moving era a well-structured working of the company was the need of the hour. The commencement of Companies Act, 2013 gave the recognition and definition of Independent Director. They ensure transparency, accountability and efficient working within the organization. However, prior the commencement of 2013 act, concept of independent director was only referred in Clause 49 of SEBI’s listing agreements. Satyam case and other financial scandals revealed the recklessness in the regulatory compliance and many directors were found guilty for engaging in the manipulation of books of account of the company. Independent director manages to mitigate business risks by stimulating strong relations between stakeholders, shareholders, and investors for company’s welfare, growth and fairness to its shareholders and society.
RESEARCH OBJECTIVES
How the status of independent director has evolved overtime.
Analyzing the impact of independent director on corporate governance.
Maintaining effectiveness and balance in his/her status of position while simultaneously facing challenges by the colleagues.
HISTORICAL EVOLUTION
The role and significance of independent directors erupted through events of scandals around the world which led to setting of precedents in the governance of corporate arena. Earlier in 20th century, there was not much independence and diversification in the composition of directors. During 1960s – 1980s period the notion of independent directors started gaining attention as this was the time when the world faced financial crisis. Many countries took steps to regulate a proper structure in the corporate governance. In 2000s, the world’s biggest scams transpired, the Enron and WorldCom scandals, which pulled off the curtains from insufficiency in maintaining the account; this led to dire needs in reforms of the policies governing the companies. Analyzing the condition, the American government came up with the Sarbanes- Oxley Act, 2002 which introduced stricter provisions for corporate governance and independent directors. Later, United Kingdom brought in their Companies Act, 2006 which gave requisites for independent director for their roles and for safeguarding the best interest of the company and all its shareholders. All these preceding acts gave birth to the Companies Act, 2013 India. It gave certain criteria for qualification, appointment, and duties of independent director so that the working of the company cannot be overlooked by them and malpractices in maintaining the accounts could be avoided. Still, with time amendments keep taking place to improve the status of accountability, transparency and fair dealing in the companies.
LEGISLATIVE FRAMEWORK
As companies constitute large amount of national income for the country, it was necessary for the government to construct stringent laws so that companies cannot do concealment of funds in the Statement of financial Position, when companies does a scandal it not just disturbs the financial condition of the company but also creates unemployment as many aspects goes with it; the value of share goes down, the company goes bankrupt, the whole money flow of the economy faces destruction. To resolve this, government made a mandate provision of independent director in the company under section 149 of Companies Act, 2013, it states that every SEBI registered (or listed) company shall have atleast 13 of its total number of directors as independent director. The central government has set a limit for minimum number of independent directors and maximum is 15 but if the company wishes to have more independent director then it can pass a special resolution (i.e. 75% of voting). While Public company shall have atleast two independent director if they come other any such category; paid up share capital is INR 10 crore or more OR turnover is of INR 100 crore or more OR outstanding loans, debentures and deposits as whole exceeds INR 50 crore. All these criteria should be taken into account by the last date of the latest audited financial statements.
Now, a question arises who is and what is an independent director?
An Independent directors, are non-executive person who is not involved in the regular activities of the company neither he/she shall be associated with the promoter or the management of the company. Independent director utmost duty is to keep up their integrity, expertise and independence for the best interest of the company and its shareholders, equating the decisions taken by the board and not favoring anyone. Section 149 defines independent director as someone who is a director other than a managing director or a whole time director or a nominee director. Independent directors should not have any of their interest in the firm such as not having any pecuniary relationship with the company, its holding, subsidiary, or associate company (CASH), or their promoters or directors during the current year and preceding two financial years. Same is for the relatives of the independent director but the exemption has a bit alteration, the financial relation should not involve amount 2% or more of its gross turnover or total income of fifty lakh or such higher amount as may prescribed, whichever is lower during two immediately preceding financial year (FY) or current FY.
Additional Provisions for Independent director and his/her relatives:
Neither of them shall hold or has held the post of key managerial personnel or is or has been employee of the CASH in any of the immediately preceding three years in which they proposed to be appointed.
Is or has been an employee or proprietor or a partner in a firm of auditors or company secretaries or cost auditors of CASH; or any legal or a consulting firm that has or had any transaction with CASH amounting to 10% or more of the gross turnover of such firm, in any of the three FY just before the years he/she offered to be appointed.
If he/she or his/her relatives has 2% or more of the total voting power of the company in aggregate.
If he/she is CEO or director of Non-Profit Organization that gets 25% or more of its funds from the company, any of its promoters, directors or its CASH or that holds 2% or more of the voting power of the company.
In case, if any individual sustains any of the above mentioned provisions then he/she cannot be elected as an independent director as it will hamper his/her independence to take decisions for the company.
IMPACT MEASUREMENT
Independent director’s work is crucial for the smooth working of the company as it brings transparency, accountability and stability in the working. The pivotal role of independent director is preserving the rights of minor shareholders and narrowing the disparity between big and small shareholders. Independent directors enjoy power in decision making and have their influence over the affairs.
Does the word ‘Independent’ in independent director means giving them all independence without any restriction?
The answer lies in the negative, Schedule IV of the Companies Act and section 166, illustrates professional guidelines to be followed by an independent director such as upholding ethics of integrity and probity, exercising responsibilities in a bonafide manner and not gaining any personal interest, devoting adequate amount of time and attention to their obligation for better decision making and if any situation appears which retards their independence then they should inform the board.
Can the performance of independent director be evaluated?
Yes, Board of Directors prepare performance evaluation report, in which the board observes the governing quality of the independent director, if he/she is serving in more than seven companies then it is a violation of listing agreement of the companies act, and if the independent director violates any of the provision of section 164 then he/she could be disqualified.
Although independent performs best of their duty as the pressure on them is much more. Under section 149 which talks about the qualification of independent director, and rule 5 of companies rules 2014 provides further qualifications states possessing of appropriate skills, experience and knowledge in fields of finance, law, management, sales, marketing, administration, research, corporate governance , technical operations or other qualities required in carrying the company’s affairs, which ensures the independent direct perform best of their ability or else they would be disqualified.
To abide by criteria of independence if any independent director meets it then section 149 requires them to give declaration as dictated in section 149(6);
At the initial meeting of board of directors in which he participate as a director and then
At the first board of directors meeting in every financial year, or
Whenever there is a situation which questions his/her status of independence
CHALLENGES AND LIABILITIES
Till this part of the article it has looked like there is not much problems faced by independent directors and their duties could be done with ease. But it is not as plain as it looks it is like a bumpy ride journey to be an independent director as there is not much social life with colleagues, it follows the isolating work culture, cannot even indulge in companies affairs fully in order to stay fair. The work culture for them is not fair to them as executive directors tend to do some alterations in the accounts before handing over, they cannot rely on the documents fully without doing their own research.
For companies it is a challenge to find suitable independent directors, to resolve this section 150 provides creation and maintenance of data bank which constitutes of names of independent directors which makes easier for companies to choose for themselves with due diligence.
Can anyone create this data bank?
No, section 150 read with 469 states any association or institution or agency authorized by Central Government can only create such databanks of willing persons who are eligible to act as an independent director and shall databank shall be published on websites of Ministry of Corporate Affairs or any website approved by central government.
Liabilities of independent directors:
Independent directors shall be held liable under section 149 only when the act was done under their knowledge and they did not take due diligence while giving their consent or connivance to such acts. For engaging or doing any fraudulent activity they can be held liable under section 447, and if the fraud gets proven they can face imprisonment of upto 10 years along with fines. Under section 450, they can be charged with fines if they are involved in the violation of sections 134 (financial statements), 185 (loans to directors), 188 (related party transactions) or any such violations of the provisions of the act which leads to improper conduct or shows non-compliance.
CONCLUSION
The development in the roles and responsibilities of independent director illustrates progression in the mindset of businessmen and investors, they are understanding the value of upholding transparency, accountability and ethical working standards in the firm. The companies act, 2013 gave more to the concept of independent director, even training and expertise sessions were been given to independent directors by the initiatives of government. The act made it mandatory for the firms who are passing the criteria to constitute committees with independent director shall be exposed to the affairs of company when asked. The company should be maintaining proper solvency and profitability ratio and upload on their websites so that the independent director could take unbiased and better decisions for the firm.
References:
Books:
Ms. Reena Chadha and Mr. Sumant Chadha, Corporate Laws, Scholar Tech Press.
Articles:
Mr. Pulkit Popli and Ms. Anushka Mohapatra, Deficiencies in the present outreach of independent director within a corporation, Bharati Law Review, oct – dec, 2017.
