Independent Directors & Corporate Governance

Independent Directors & Corporate Governance

“The issue of Independent Directors is back in focus, thanks to the “ownership row” in a corporate giant in the country and a renewed stress on Corporate Governance across the world.”

This article analyses the traits of Independent Directors in the present times of stiff competition.
Who Is An Independent Director?
As per sub-section 6 of Section 149 of THE COMPANIES ACT, 2013 Act, Independent Director means a director other than a managing director or whole time director or a nominee director,
a) Who, in the opinion of the Board, is a person of integrity and possesses relevant expertise and experience;
b) (i) Who is or was not a promoter of the company,
(ii) Who is not related to promoters or directors in the company
c) Who has or had no pecuniary relationship with the company
d) None of whose relative has or had pecuniary relationship or transaction with the company.
e) Who, neither himself nor any of his relative:
(i) Holds or has held the position of a key managerial personnel
(ii) Is or has been an employee or proprietor or a partner, in any of the three financial years proceeding.
(iii) Holds together with his relative two per cent or more of the total voting power of the company; or
(iv) Is a Chief Executive or director, of any non-profit organization, or who possesses such other qualifications as may be prescribed.
Why have Independent Directors on the Board?
There are several distinct benefits that an independent board of directors can bring to a company, ranging from long-term survival to improved internal controls.
Independent directors in the board can:
• Counterbalance management weaknesses in a company.
• Ensure legal and ethical behaviour at the company, while strengthening accounting controls.
• Extend the “reach” of a company through contacts, expertise, and access to debt and equity capital.
• Be a source of well-conceived, binding, long-term decisions for a company.
• Help a company survive, grow, and prosper over time through improved succession planning through membership in the nomination committee etc.
What is Corporate Governance???
Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”
Corporate Governance & Board of Directors:
21st century is witnessing the role and activity of the corporate boards being redefined by many forces. International financial investors, media focus and corporate governance initiatives are the main forces that are responsible for affecting these changes.
“We now do not need new legislations to improve corporate governance. What is required now is proper implementation with a view to bring about overall enhancement of the corporate values.”
Composition & Structure of Board of Directors under CORPORATE GOVERNANCE:
All Corporate Governance regulations provide the basis on the composition and structure of the Board. I am of the opinion that this is the most important aspect for any Board’s functioning.
It is the means by which power is distributed so that the objectivity in decision- making of the Board is achieved and that no single party can dominate over such decision-making in the company. The core of this requirement is that Board should include a sufficient number of non- executive members with appropriate competencies, who are independent.
Independent directors and corporate governance:
The concept of the institution of Independent Director’s is simple. They are expected to be independent from the management and act as the trustees of shareholders. This implies that they are obligated to be fully aware of and question the conduct of organizations on relevant issues.
The role of an Independent Director is considered to be of a great significance. The guidelines, role and functions and duties and etc. are broadly set out in a code described in Schedule IV of the Act, 2013.
The code lays down certain critical functions like safeguarding the interest of all stakeholders, particularly the minority holders, harmonizing the conflicting interest of the stakeholders, analysing the performance of management, mediating in situations like conflict between management and the shareholder’s interest etc.
The code also lays down certain important duties like keeping themselves updated about the company and the external environment in which it operates;
• Not disclosing important and confidential information of the company unless approved by the board or required by law;
• Actively participating in committees of the board in which they are chairperson or members;
• Keeping themselves update and undertaking appropriate induction and refreshing their knowledge, skills and familiarity with the company, regularly attend the general meetings of the company and etc.

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