INDEPENDENCE OF DIRECTOR   Myth   or Reality Pavan Kumar Vijay
Concept of Independent Director <ul><li>Independent director means a director who is not connected or associated with the ...
Genesis <ul><li>The concept of Independent director has been originated to drive the companies towards inculcating the con...
What is Corporate Governance???
Corporate Governance means… Fairness to all stakeholders  Mutual Trust, Transparency and Togetherness Unrestricted Communi...
Definition of Independent Director – Clause 49 (1)(A)(iii) He has not been an executive of the company in the immediately ...
Definition under the Companies Amendment Bill, 2003 <ul><li>He should not be relative of Chairman or MD or Whole Time Dire...
Difference between the proposed definition under the Companies Amendment Bill, 2003 and Clause 49 of Listing Agreement. Sh...
Definition of Independent Directors raises some very fundamental issues <ul><ul><li>Different definition of Independent Di...
Qualifications & Disqualifications <ul><li>No educational qualification under the Companies Act, 1956 </li></ul><ul><li>In...
Appointment of Independent Director <ul><li>An Independent director can be appointed by passing a Board resolution or Ordi...
Duties & Responsibilities  “Duty is what we expect of others” “The price of greatness is responsibility” <ul><li>As Presen...
Duties & Responsibilities <ul><li>Primary Duties: </li></ul><ul><li>Act in the best interests of the company </li></ul><ul...
Enhanced Responsibilities & Duties <ul><li>To compel directors to act in accordance with the strict terms of their mandate...
Is an independent Director as a member of the Company Board equally responsible as the Company Board ? <ul><li>No, unless ...
Liabilities <ul><li>Ultra-vires acts </li></ul><ul><li>Criminal liability under Negotiable Instruments Act </li></ul><ul><...
Rights & Authorities <ul><li>Right to be sent the notice of every Board Meeting of the company in advance as per the Artic...
MYTHS…
MYTHS-Qualities of Independent Directors   <ul><li>Independent directors should have </li></ul><ul><ul><li>Unbiased attitu...
<ul><li>Protection of minority interest </li></ul><ul><li>Impediments to cross border voting will be removed </li></ul><ul...
MYTHS-Presence of Independent Director means… <ul><li>Employees participation in management: performance enhancing mechani...
REALITY…
Reality   <ul><li>Work to safeguard themselves from liability </li></ul><ul><li>Work in accordance with the wishes of Boar...
Guidance for Independent Directors –The Taste and Smell Tests   <ul><li>Reputation of company </li></ul><ul><li>Capability...
Thank You… Pavan Kumar Vijay MD, Corporate Professionals
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Independence of Director: Myth and Reality

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Independence of Director: Myth and Reality

  1. 1. INDEPENDENCE OF DIRECTOR Myth or Reality Pavan Kumar Vijay
  2. 2. Concept of Independent Director <ul><li>Independent director means a director who is not connected or associated with the company in any manner and works only to safeguard the interest of members who individually cannot look after their interest. </li></ul>
  3. 3. Genesis <ul><li>The concept of Independent director has been originated to drive the companies towards inculcating the concept of corporate governance in their management. </li></ul>
  4. 4. What is Corporate Governance???
  5. 5. Corporate Governance means… Fairness to all stakeholders Mutual Trust, Transparency and Togetherness Unrestricted Communication and Continuous Feedback Sharing Knowledge, Success Stories and Experience Sharing Happiness and Concerns Helping Each Other – Round the Clock
  6. 6. Definition of Independent Director – Clause 49 (1)(A)(iii) He has not been an executive of the company in the immediately preceding three financial years He is not associated with the statutory audit firm or the legal firm having material association with the company. He is not related to promoters or persons occupying management positions at the board level or at one level below the board He does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates. He is not a material supplier, service provider or customer or a lessor or lessee of the company. He is not owning two percent or more of the block of voting shares
  7. 7. Definition under the Companies Amendment Bill, 2003 <ul><li>He should not be relative of Chairman or MD or Whole Time Director or Secretary. </li></ul><ul><li>He Should not have been an auditor, internal auditor or legal advisor or consultant of the company during any of the 3 proceeding financial years. </li></ul><ul><li>He Should not have been a supplier, vendor or customer </li></ul><ul><li>He Should not hold 2% or more shares of the company, presently or in past </li></ul><ul><li>He Should not have hold any position in the Company, i.e. ex-employee </li></ul><ul><li>He Should not have been a Director for continuous period of 9 years. </li></ul><ul><li>Nominee Directors of Bank or FIs will not be considered as Independent Directors </li></ul>
  8. 8. Difference between the proposed definition under the Companies Amendment Bill, 2003 and Clause 49 of Listing Agreement. Should not have been an executive of the Company in the immediately proceeding 3 financial years <ul><ul><li>Should not have hold any position in the Company, i.e. ex-employee </li></ul></ul>Should not hold 2% or more shares of the company Should not hold 2% or more shares of the company, presently or in past Nominee Directors of Bank or FIs will be considered as Independent Directors Nominee Directors of Bank or FIs will not be considered as Independent Directors Appointment of Non Executive Director beyond continuous period of 9 years not permissible Should not have been a Director for continuous period of 9 years Should not be a supplier, service provider or customer of the company <ul><ul><li>Should not have been a supplier, vendor or customer </li></ul></ul><ul><ul><li>Should not have been a partner or an executive of the statutory audit firm or an internal audit firm or leagal and consultancy firm, during last 3 years </li></ul></ul>Should not have been an auditor, internal auditor or legal advisor or consultant of the company during any of the 3 proceeding financial years <ul><ul><li>Should not be related to promoters or management at the Board level or at one level below the Board </li></ul></ul>Should not be relative of Chairman or MD or Whole Time Director or Secretary As per Clause 49 of L.A Companies Amendment Bill, 2003
  9. 9. Definition of Independent Directors raises some very fundamental issues <ul><ul><li>Different definition of Independent Director in Companies Amendment Bill and in Listing Agreement </li></ul></ul><ul><ul><li>Disqualification of any person as Independent Director if he has been a Director or Independent Director of the Company for a consecutive period of NINE years </li></ul></ul><ul><ul><li>Persons having “any transaction” with the company to not to qualify as an Independent Director – a sweeping disqualification </li></ul></ul><ul><ul><li>Training related provisions </li></ul></ul>
  10. 10. Qualifications & Disqualifications <ul><li>No educational qualification under the Companies Act, 1956 </li></ul><ul><li>Indirectly some qualification prescribed in New Clause 49 of Listing Agreement (w.e.f. 31st March 2004) </li></ul><ul><ul><li>All members of Audit Committee shall be financially literate, and </li></ul></ul><ul><ul><li>At least one member of Audit Committee shall have accounting or related financial management expertise </li></ul></ul><ul><li>Disqualification of Directors U/s 274(1) of the Companies Act </li></ul><ul><ul><li>Various disqualification prescribed under sub clause (a) to (f) </li></ul></ul><ul><ul><li>Section 274(1)(g) – In case of an existing director of a public company, if such company : </li></ul></ul><ul><ul><ul><li>has not filed the annual account and annual return for any continuous three financial years commencing on and after 1.04.99 or </li></ul></ul></ul><ul><ul><ul><li>has failed to repay its deposit or interest thereon on due date or redeemed its debenture on due date or pay dividend and such failure continues for one year or more </li></ul></ul></ul><ul><li>Retirement age of 75 years proposed U/s 280, as per the Amendment Bill </li></ul>
  11. 11. Appointment of Independent Director <ul><li>An Independent director can be appointed by passing a Board resolution or Ordinary resolution in the General Meeting of the Company. </li></ul>
  12. 12. Duties & Responsibilities “Duty is what we expect of others” “The price of greatness is responsibility” <ul><li>As Present directors </li></ul><ul><li>As Past directors </li></ul><ul><li>As Members of Audit Committee </li></ul><ul><li>As Explicit and implicit </li></ul><ul><li>Responsibility for subsidiaries </li></ul>
  13. 13. Duties & Responsibilities <ul><li>Primary Duties: </li></ul><ul><li>Act in the best interests of the company </li></ul><ul><li>Safeguard the interests of the stakeholders </li></ul><ul><li>Attend Board Meetings and participate in decisions </li></ul><ul><li>Avoid conflict situations </li></ul><ul><li>Not seek personal gains </li></ul><ul><li>Maintain confidentiality </li></ul><ul><li>Fiduciary duty </li></ul><ul><li>Discharge duties required in specific committees of the Board </li></ul>
  14. 14. Enhanced Responsibilities & Duties <ul><li>To compel directors to act in accordance with the strict terms of their mandate </li></ul><ul><li>To compel them to exercise care and skill in carrying out their various functions </li></ul><ul><li>To compel them to use their wide discretionary powers in good faith and proper purpose, & </li></ul><ul><li>Finally, to compel them to act loyally in advancing the interest of their company. </li></ul>
  15. 15. Is an independent Director as a member of the Company Board equally responsible as the Company Board ? <ul><li>No, unless he, the independent director, is charged with a </li></ul><ul><li>specific responsibility. </li></ul>AN IMPORTANT QUESTION
  16. 16. Liabilities <ul><li>Ultra-vires acts </li></ul><ul><li>Criminal liability under Negotiable Instruments Act </li></ul><ul><li>Damages for breach of contract </li></ul><ul><li>Director’s responsibility statements </li></ul><ul><li>Liability of directors under other laws (Labour, food adulteration, essential commodities, etc.) </li></ul>
  17. 17. Rights & Authorities <ul><li>Right to be sent the notice of every Board Meeting of the company in advance as per the Articles. </li></ul><ul><li>Right to be sent the agenda of every Board Meeting of the company in advance as per the Articles. </li></ul><ul><li>Right to be appointed on various committees like Audit Committee, Remuneration committee, Shareholder Grievance Committee etc. </li></ul><ul><li>Right to vote on every matter brought before the Board of Company </li></ul><ul><li>Right to get minutes of the Board Meeting </li></ul>
  18. 18. MYTHS…
  19. 19. MYTHS-Qualities of Independent Directors <ul><li>Independent directors should have </li></ul><ul><ul><li>Unbiased attitude </li></ul></ul><ul><ul><li>Highest standards of personal integrity </li></ul></ul><ul><ul><li>Excellent judgment and an ability to make informed decisions within time constraints </li></ul></ul><ul><ul><li>Professional credibility </li></ul></ul><ul><ul><li>Capacity to think strategically </li></ul></ul><ul><ul><li>Demonstrate sound communication skills </li></ul></ul><ul><ul><li>Sound interpersonal skills </li></ul></ul><ul><ul><li>Team orientation </li></ul></ul>
  20. 20. <ul><li>Protection of minority interest </li></ul><ul><li>Impediments to cross border voting will be removed </li></ul><ul><li>Insider trading and abusive self-dealing will be prohibited </li></ul><ul><li>Board members and KMPs will be compelled to disclose their interest in material contracts </li></ul>MYTHS-Presence of Independent Director means…
  21. 21. MYTHS-Presence of Independent Director means… <ul><li>Employees participation in management: performance enhancing mechanisms will be promoted </li></ul><ul><li>Whistle-blowers’ interest will be protected </li></ul><ul><li>Creditors’ rights will be protected through security interest enforcement and bankruptcy laws </li></ul>
  22. 22. REALITY…
  23. 23. Reality <ul><li>Work to safeguard themselves from liability </li></ul><ul><li>Work in accordance with the wishes of Board of Company </li></ul>
  24. 24. Guidance for Independent Directors –The Taste and Smell Tests <ul><li>Reputation of company </li></ul><ul><li>Capability to meet the requirements and expectations </li></ul><ul><li>Demonstrate independence </li></ul><ul><li>Whether the company has adequate controls and whether they can be relied upon </li></ul><ul><li>Ability to resist pressure </li></ul><ul><li>Knowledge on current developments </li></ul><ul><li>Aware and abide by corporate code of conduct </li></ul><ul><li>Seek expert help </li></ul><ul><li>Prepare in advance for Board Meetings </li></ul><ul><li>Maintain Confidentiality </li></ul>
  25. 25. Thank You… Pavan Kumar Vijay MD, Corporate Professionals

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