Widened role of Independent Directors- Real vs. Deemed Independence

To facilitate enhanced transparency in the functioning of the Board and Committees, the Companies Act 2013 has brought in the much-awaited reforms. The Act broadly describes the selection criteria, roles and responsibilities, manner of appointment, and vacation of office by an Independent Director (ID). Prior to moving forward, let’s understand the term ‘Independent Director’. A person, not having any pecuniary relationship with the Company, or its promoters and directors, and is appointed by the Board as Independent Director, falls under this category. It is expected that with the enhanced recognition and capabilities of the ID, the company would handle its operations much prudently and the stakeholders are sure to benefit.

Further, the appointment of an Independent Director shall be approved in the General Meeting and it is now mandatory for every public limited company to have at least one-third of the total number of directors as Independent Directors. The Board of any company can search for suitable ID from the database maintained by various authorities, one of which is http://www.primedirectors.com/, a corporate governance initiative by NSE and BSE, and launched by the Chairman of SEBI. Professionals seeking directorships can visit the platform so as to add their candidature to the database.

The Companies Act 2013 has enumerated distinctive headings that define the roles and responsibilities of IDs. Few prominent responsibilities include (1) assisting in bringing an independent judgment to bear on the Board’s deliberations especially on issues of strategy, performance, risk management, resources, key appointments, and standards of conduct, (2) satisfying themselves on the integrity of financial information, and that financial controls and systems of risk management are robust and defensible, (3) safeguarding the interests of all stakeholders, particularly the minority shareholders, and (4) determining appropriate levels of remuneration of executive directors, KMPs and senior management, and playing a prime role in appointing and where necessary recommending removal of executive directors, KMPs and senior management.

The IDs of a company shall hold at least one meeting in a year, wherein all IDs must strive to be present, without the attendance of non-IDs and other members of the management. Herein, the IDs shall review the performance of the Chairperson, non-IDs and the Board as a whole, and shall assess the quality and timeliness of flow of information between the management and the Board. The Act also mandates the constitution of CSR Committee consisting of at least one ID, Audit Committee with IDs in majority, and Nomination and Remuneration Committee with not less than one-half of the members as IDs.

To bring in effectiveness in the functioning, the Act also mandates that no ID shall hold office for more than two consecutive terms of 5 years; however such ID shall be eligible for re-appointment after the expiration of three years. Also, an ID shall not be entitled to any stock option, and may receive remuneration by way of fee, reimbursement of expenses for participation in Board and other meetings, and profit related commission as approved by the members. Further, every ID 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 FY or whenever there is any change in the circumstances which may affect his status as an ID, give a declaration regarding compliance with the criteria of independence.

Surely, the enhanced role of Independent Directors would enable the stakeholders trust the functioning of the management as well as the Board. The Board, on the other hand, would become more vigilant while undertaking the tasks of policy making and use of funds. However, it is too early to say that every of the deficiency in the working of the company and in the utilization of stakeholders’ funds can be regulated with these measures. Incidences of selecting known professionals by the Board for the role of ID can also not be overlooked. Though the Act bestows upon the shoulders of IDs the responsibility of ensuring fair management, the target can remain unachieved as the management can come up with planned and pre-compromised professionals as IDs. Such presence would not define transparency and vigilance in real terms.

To transform the deemed independence to real one, the MCA along with regulatory bodies (SEBI and RBI) has to play a vital role in the appointment of IDs. I would suggest that the Ministry and SEBI must actively participate in such appointments in listed companies, wherein the Board is vulnerable to play with provisions. The compulsion of assent of shareholders can rarely serve any purpose. The discussion of MCA with the Institute of Directors, UK with a view to utilizing their expertise for training Indian professionals willing to become IDs is truly welcomed; however a well-staffed Committee must be set up by the SEBI that shall ensure core legitimacy and transparency, similar to the selection of Statutory Central Auditors (SCAs) undertaken by Selection Committee of GOI on basis of list forwarded by the RBI.

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