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Role of independent directors


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Role of independent directors

  1. 1. Role of Independent Directors under Companies Act<br />Divya Raman<br />Corporate Department<br />Altacit Global<br />Email: Website:<br />
  2. 2. Report of the Kumar Mangalam Birla Committee on Corporate Governance<br />Independent directors are directors who apart from receiving director’s remuneration do not have any other material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which in the judgment of the board may affect their independence of judgment.<br />
  3. 3. Companies Act and Listing Agreement<br />Independent Directors – not defined under Companies Act.<br />Clause 49 of the Listing Agreement defines Independent Directors in the same way as defined by Kumar Mangalam Birla Committee.<br />
  4. 4. Independent Directors under Listing Agreement<br />Composition of the Board<br />– Not less than 50% of the board to be non-executive directors<br />– Independent Directors:<br /> If the chairman executive:<br />– At least half of the board should comprise of independent directors<br />
  5. 5. If Chairman non-executive:<br />– At least one- third of the board should comprise of independent directors.<br />Non-executive directors’ remuneration to be approved by shareholders<br />Board meetings – to meet at least 4 times, with gap not exceeding 3 months. Minimum information for board meetings laid down.<br />
  6. 6. Non-Executive Directors - Need<br /><ul><li> Play crucial role in implementing the principles of effective corporate governance.
  7. 7. Counterbalance managerial infirmities in the Company.
  8. 8. Ensure legal and ethical behavior of the Company.
  9. 9. Source of well conceived long term decisions for the Company.
  10. 10. Deemed to provide necessary personal and technical expertise in order abate fraud, misappropriation by the Company or its directors.</li></li></ul><li>Selection of Independent Directors<br />Procedure different from procedure of selection of whole time directors.<br />From amongst persons, who in the opinion of the company are persons with integrity, possessing relevant expertise and experience.<br />Independent nominations committees which would determine the qualifications and other requirements for the independent directors.<br />
  11. 11. Role of Independent Directors<br />To improve corporate credibility and governance standards.<br />Function as watchdog of the Company.<br />Maintain balance in a Promoter dominated scenario.<br />Play vital role in risk management.<br /> <br />
  12. 12. Contd….<br /><ul><li> Protect the interests of the minority shareholders vis-à-vis the promoters.
  13. 13. Scrutinize management performance.
  14. 14. Satisfy them that financial information is accurate and ensure that robust risk management is in place.
  15. 15. Be prepared to attend AGMs and discuss issues relating to their roles. </li></li></ul><li>Responsibilities of Independent Directors<br /><ul><li> Periodically review legal compliance reports prepared by the company as well as steps taken by the company to cure any taint.
  16. 16. To properly according to the spirit of corporate governance as director on the board and as Member/Chairman across various committees viz. the Audit Committee, the Shareholders’ Grievance Committee and the Remuneration Committee of the company.</li></li></ul><li>Further responsibilities<br /><ul><li>Prepare themselves for the meeting of the Company.
  17. 17. Be objective in forming sound decisions relating to the Company and its business.
  18. 18. Be open minded, free and frank in expressing their opinions and at the same time be willing to engage in meaningful debates.
  19. 19. Be committed to decisions made as a Board.</li></li></ul><li>Contd…<br /><ul><li>Continuously seek information both from within and if required outside professional knowledge to keep abreast with the latest developments in the areas of the Company’s operations.
  20. 20. Be informed on laws and regulations influencing their functioning as directors.
  21. 21. Utilize the expertise they possess to the good advantage of the Company.</li></li></ul><li>Circumstances under which Independent Directors are not independent<br /><ul><li> Selection Procedure.
  22. 22. No Age limit.
  23. 23. No specific qualification is required.
  24. 24. No right to interfere in day-to-day operations.
  25. 25. No time limit for replacement of an independent director.</li></li></ul><li>Way Out<br /><ul><li>Independent Directors to be appointed/nominated by a separate meeting of the minority shareholders, not representing the majority shareholders.
  26. 26. To ensure that the independent directors spend adequate time, they must be compensated well.
  27. 27. Independent Directors should not get any options.
  28. 28. Chairmen of the committees must be a rotating position.
  29. 29. Liability of independent directors should be distinguished from the executive directors and non independent directors. </li></li></ul><li>Liabilities of ID under Companies Bill, 2009<br /><ul><li> An ID should exercise his duties with due and reasonable care, skill and diligence.
  30. 30. ID should form the majority and chair the audit and remuneration committee.
  31. 31. Chairman of stakeholders committee should also be non-executive director.
  32. 32. IDs also come under the definition of “Officer-in-default”.</li></li></ul><li>Case Laws<br />SMS Pharmaceuticals Limited v. Neeta Bhalla [2005] 6 CLJ 144 (SC)<br />The liability arises on account of conduct , act or omission on the part of a person and not merely on account of holding an office or a position in a company.<br />
  33. 33. N.K. Wahi v. Sekhar Singh and others (2007) 2 LJ 10 (SC)<br />Saroj Kumar Poddar v. State (NCT) of Delhi and Anr. [2007] 137 Comp Cas 837, 842 (SC)<br />Held: Specific averments have to be made against the accused Director.<br />
  34. 34. Satyam Issue<br />Serious Fraud Investigation Office (SFIO) has filed seven cases against eleven ex-directors (including IDs) of Satyam.<br />Nearly 340 IDs have resigned from their post.<br />Many people are now not advent to accept the post of ID and tarnish their reputation.<br />
  35. 35. Conclusion<br />There is no need to implement new laws; all we need to do is to renew existing laws. Independent directors may not be in a position to stop management fraud perpetrated at the highest level, but with high level of commitment and due diligence they should be able to identify signals that indicate that everything is not going right. <br />
  36. 36. THANK YOU<br />