Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Role of Independent Director in Corporate Governance


Published on

Published in: Business, Economy & Finance
  • why am i not able to download the ppt
    Are you sure you want to  Yes  No
    Your message goes here

Role of Independent Director in Corporate Governance

  1. 1. Role of Independent Director in Corporate Governance Pavan Kumar Vijay Managing Director Wednesday, February 22, 2012
  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. <ul><li>“ 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.” </li></ul><ul><li>-The Institute of Companies Secretaries of India </li></ul>
  6. 6. Corporate Governance Framework Output – Input = Wealth Created ? Sustainability Happiness and Prosperity of all Stakeholders Reinvestment Distribu- tion <ul><li>Research and </li></ul><ul><li>Development </li></ul><ul><li>HR Development </li></ul><ul><li>Infrastructure </li></ul><ul><li>Risk Management </li></ul><ul><li>SUPPLIERS </li></ul><ul><li>Adequate Returns </li></ul><ul><li>HUMAN ASSETS </li></ul><ul><li>Adequate </li></ul><ul><li>Remuneration </li></ul><ul><li>CUSTOMERS </li></ul><ul><li>Affordable Prices </li></ul><ul><li>PUBLIC </li></ul><ul><li>Payment of Taxes and Partnership in National Development Projects </li></ul>Wealth Creation Wealth Management Wealth Sharing Enhanced Capabilities Best Management Practices are Vital Here Law and Ethics are Vital Here
  7. 7. Stakeholders in Value Chain SUPPLIERS CUSTOMERS HUMAN RESOURCE Supply Funds, Materials and Services Value Addition and Management of Resources Give Opportunity to Co. to Satisfy their Needs Adequate Returns for Funds, Material and Services Supplied Adequate Salary and Security for leading a Happy Life Best Quality Products and Customer Care at Minimum Prices ROLE OF STAKEHOLDERS EXPECTATIONS OF STAKEHOLDERS Potential Suppliers, Human Resources and Customers Biological, Economic and Cultural Environment PUBLIC PUBLIC EXPECTS PARTNERHIP FOR SUSTAINABLE DEVELOPMENT
  8. 8. Satyam Vada Dharmam Chara - Taittariya Upanishad
  9. 9. <ul><li>“ Forever speak the truth and follow the dharma ” </li></ul>
  10. 10. <ul><li>Truth : Disclosure of Actual State of Affairs (Transparency in operations and transactions) </li></ul>
  11. 11. <ul><li>Dharma : “Dharma is for the stability of society, the maintenance of social order and the general well-being and progress of humankind.” </li></ul><ul><li>- Karna Parva of the Mahabharata. Verse-58 in Chapter 69 </li></ul>
  12. 12. <ul><li>Corporates are also expected to use their </li></ul>Capacity, Knowledge and Resources Maximisation of stakeholders’ value and well-being and progress of humankind TOWARDS THROUGH Transparency, accountability and truthful disclosure of state of affairs Dharma Truth
  13. 13. <ul><li>This is our own age old mantra of </li></ul><ul><li>Good Governance </li></ul>
  14. 14. <ul><li>Companies that have followed these </li></ul><ul><li>principles of </li></ul><ul><li>Corporate Governance </li></ul><ul><li>have </li></ul>
  15. 15. <ul><li>Consistently earned high returns, </li></ul><ul><li>increased their net worth and </li></ul><ul><li>enhanced their shareholders wealth </li></ul>
  16. 16. <ul><li>..and accomplished </li></ul>
  18. 18. Who is Independent Director???
  19. 19. One who has Independency of Judgment
  20. 20. Vs.
  21. 21. Definition of Independent Director – Clause 49 (1)(A)(iii) of Listing Agreement <ul><li>Not having any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates. </li></ul><ul><li>Not related to promoters or persons occupying management positions at the board level or at one level below the board </li></ul><ul><li>Not been an executive of the company in the immediately preceding three financial years </li></ul>
  22. 22. Definition of Independent Director – Clause 49 (1)(A)(iii) of Listing Agreement <ul><li>Not associated with the statutory audit firm or the legal firm having material association with the company. </li></ul><ul><li>Not a material supplier, service provider or customer or a lessor or lessee of the company. </li></ul><ul><li>Not owning two percent or more of the block of voting shares </li></ul>
  23. 23. Directorships Matrix Executive Group (Salaried) Promoter Group Independent Group Managing / Whole Time Director    Director    Chairman  Executive Chairman  Executive /Non-Executive Chairman  Non-Executive Chairman
  24. 24. Position of Independent Director Executive Director Owner Director Independent Director Board of Directors Interest of Company Interest of Shareholder Interest of Stakeholders Balancing of Interests Primary Duty Enhanced Responsibility
  25. 25. Independency of Director Concept & Reality
  26. 26. Concept <ul><li>Legal </li></ul><ul><ul><li>Disinterested director </li></ul></ul><ul><ul><li>Unbiased decisions </li></ul></ul><ul><ul><li>Balancing of conflicting interests </li></ul></ul><ul><ul><li>Protection of shareholders’ interests </li></ul></ul><ul><ul><li>Protection of stakeholders’ interests </li></ul></ul><ul><ul><li>Protection of whistleblower’s interests </li></ul></ul><ul><li>Managerial </li></ul><ul><ul><li>Bring expertise in the Board composition </li></ul></ul><ul><ul><li>Infusion of new ideas </li></ul></ul><ul><ul><li>Develop a system in the Board Culture </li></ul></ul>
  27. 27. Reality Independent Director Disinterested Director Uninterested Director No Yes
  28. 28. Reality – Appointment of Independent Director Compliance in Spirit Compliance in Letter <ul><li>Disinterested Director </li></ul><ul><li>Expert in a particular discipline </li></ul><ul><li>Uninterested Director </li></ul><ul><li>Friend or relative not coming u/s 6 of Companies Act </li></ul>
  29. 29. Reality – Appointment of Independent Director Compliance in Spirit Compliance in Letter <ul><li>Knowledge about the Company’s business </li></ul><ul><li>Precedence to knowledge over names </li></ul><ul><li>Capability to dissent </li></ul><ul><li>Not concerned with the Company’s business </li></ul><ul><li>Precedence to name over knowledge </li></ul><ul><li>Yes- Man </li></ul>
  30. 30. Reality – Working of Independent Director Compliance in Spirit Compliance in Letter <ul><li>Provides independent assessment of business decisions. </li></ul><ul><li>Provides expert comments on the subject </li></ul><ul><li>Acts as per the whims of management. </li></ul><ul><li>Silent observer at the Board meetings. </li></ul>
  31. 31. Reality – Working of Independent Director Compliance in Spirit Compliance in Letter <ul><li>Informed decisions </li></ul><ul><li>Ensures unbiased decisions </li></ul><ul><li>Decision on selective information. </li></ul><ul><li>Independent status takes a backseat. </li></ul>
  32. 32. Independent Director Critical Issues
  33. 33. Ingredients of Independent Directors <ul><ul><ul><li>Those who are eligible , have no time . </li></ul></ul></ul><ul><ul><ul><li>Those who have time , are not eligible. </li></ul></ul></ul>BUT
  34. 34. Informed Decisions – Not possible <ul><ul><ul><li>Insufficient knowledge regarding the business </li></ul></ul></ul><ul><ul><ul><li>Reliance on Executive Director/CEO for information </li></ul></ul></ul><ul><ul><ul><li>Selective information sharing </li></ul></ul></ul><ul><ul><ul><li>Lack of understanding </li></ul></ul></ul>
  35. 35. Capability & Capacity <ul><ul><ul><li>No legal requirement for qualification of Independent Director except for the member of Audit Committee who shall be financial expert. </li></ul></ul></ul><ul><ul><ul><li>Quality & ingredients are subjective phenomenon. </li></ul></ul></ul><ul><ul><ul><li>No independent appointment. </li></ul></ul></ul> In 60% companies, Board consists of shareholders holding more than 50% stake.
  36. 36. Unbalanced Risk & Reward Equation ≠
  37. 37. Compensation
  38. 38. Independent Director Rights & Duties
  39. 39. Rights & Authorities <ul><li>Right to attend and vote in every Board Meeting. </li></ul><ul><li>Right to be appointed on various committees. </li></ul><ul><li>Right to demand information on every business matter. </li></ul><ul><li>Right to seek clarifications/justifications </li></ul><ul><li>Right to dissent. </li></ul>
  40. 40. Duties & Responsibilities <ul><li>Primary Duties </li></ul><ul><li>Enhanced Responsibilities </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><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>
  41. 41. Independent Director Corporate Issues & Regulator perspective
  42. 42. Corporate Issues <ul><li>Preference of Stakeholders’ interest above the interest of Company. </li></ul><ul><li>Forces disclosure of confidential information. </li></ul><ul><li>Interferes in Management Decisions. </li></ul><ul><li>Acts as Bloodhound dog. </li></ul>
  43. 43. Regulator Perspective <ul><li>Independence director has primary duty towards the Company and enhanced responsibility towards stakeholders. </li></ul><ul><li>Reduce conflict of interests of management. </li></ul><ul><li>Ensures protection of wider interest of Company and stakeholders. </li></ul><ul><li>Ensures transparency of information. </li></ul><ul><li>Provides independent Assessment while evaluating business decisions as an independent Business Advisor. </li></ul><ul><li>Acts as a watchdog. </li></ul>
  44. 44. Independent Director in a JV JV Company Partner A Partner B Interest of Partner A Interest of Partner B Interest of Company & Stakeholders Reconciliation of Interest
  45. 45. In this way INDEPENDENT DIRECTOR Ensures Application of best management practices Compliance of law in true letter and spirit Adherence to ethical standards Discharge of social responsibility for sustainable development of all stakeholders Distribution of wealth And In other words, CORPORATE GOVERNANCE
  46. 46. Corporate Governance at Infosys
  47. 47. And That’s what makes Infosys A value driven organization CRISIL – CRISIL GVC Level 1 ICRA – CGR 1
  48. 48. Thank You