The document discusses the emerging role of independent directors in company boards. It outlines their regulatory compliance responsibilities, functions like monitoring management and providing independent judgment. Independent directors must balance stakeholder interests, ensure ethical practices and compliance. They play an important role in risk management, financial oversight, and protecting minority shareholders. The document also discusses case studies and how independent directors can maximize board effectiveness through accountability and leadership while adhering to their fiduciary duties.
The Companies Act 2013 has introduced significant changes in the composition of the board of directors of a company. This White Paper contains the description of some provisions related to Independent Directors which have been modified in Companies Act 2013.
Independent directors are Hardly IndependentPuneet_Piyush
The presentation discusses, in context of India..how the spirit of legislations on Independent directors is blatantly violated while obeying the law in words.
The Companies Act 2013 has introduced significant changes in the composition of the board of directors of a company. This White Paper contains the description of some provisions related to Independent Directors which have been modified in Companies Act 2013.
Independent directors are Hardly IndependentPuneet_Piyush
The presentation discusses, in context of India..how the spirit of legislations on Independent directors is blatantly violated while obeying the law in words.
Corporate collapses, misinformation, fraud and the failure of many watchdog institutions, from auditors to investment analysts, have driven the need for change beyond the self-policing business arena and into the realm of politics - as had happened to Enron and Worldcom - as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, created an atmosphere of doubt and among the investing public. Practical applications of corporate governance in the US now mean compliance with the law - not just compliance with a "softly" enforceable voluntary code.
Issues in Corporate Governance: Company Directors – Their Duties According to the Company Law & Corporate Governance.
1. Directors are fiduciaries, i.e. empowered to oversee the management - to ensure that it is effective, honest, and dedicated to managing the company for the benefit of its shareholders and to enhance shareholder value.
2. Rules are largely common law and equitable rather than statutory.
3. As overseers, directors should serve as advisers, monitors, counselors, protagonists, and critics but not as bulldogs
Role of Independent Directors in Execution of the CSR Provisions as mandated ...CSO Partners
It covers the following topics
- Outline of the Company Act 2013
- Functions of Independent Directors
- Setting perspective and priority – formulating policy and framework
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- Keeping the Board engaged
- Review and audit
CH -11 CORPORATE GOVERNANCE AND OTHER STAKEHOLDERSBibek Prajapati
CH -11 CORPORATE GOVERNANCE AND OTHER STAKEHOLDERS
FOR CS PROFESSONAL, CA,CMA, MBA
Stakeholder Concept
• Recognition of Stakeholder Concept In Law
• Stakeholder Engagement
• Stakeholder Analysis
• Types of Stakeholders
• Caux Round Table
• Clarkson Principle of Stakeholder Management
• Governance Paradigm and Stakeholders
• Stakeholders provide resources that are more or less critical to a firm’s long-term success. These resources may be both tangible and intangible. Shareholders, for example, supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise, leadership, and commitment; customers generate revenue and provide infrastructure; and the society builds its positive corporate images.
• A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the community and the environment.
• Stakeholder engagement leads to increased transparency, responsiveness, compliance, organizational learning, quality management, accountability and sustainability. Stakeholder engagement is a central feature of sustainability performance.
• Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these include employees, customers, investors, and shareholders, as well as the governments and communities that provide necessary infrastructure.
• Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special interest groups.
• Customers are considered as the king to drive the market and they can sometimes exercise influence by consolidating their bargaining power in order to get lower prices.
• The lenders put a check and balance on the governance practices of an organization to ensure safety of their fund and as a societal responsibility.
• The organization which builds a mutually strong relationship with its vendors improves its overall performance in the marketplace.
• The society provides the desired climate for successful operation of a company business. If society turns against the company, then business lose its faith in the eyes of other stakeholders be it government or customer.
Corporate collapses, misinformation, fraud and the failure of many watchdog institutions, from auditors to investment analysts, have driven the need for change beyond the self-policing business arena and into the realm of politics - as had happened to Enron and Worldcom - as well as lesser corporate debacles, such as Adelphia Communications, AOL, Arthur Andersen, Global Crossing, Tyco, created an atmosphere of doubt and among the investing public. Practical applications of corporate governance in the US now mean compliance with the law - not just compliance with a "softly" enforceable voluntary code.
Issues in Corporate Governance: Company Directors – Their Duties According to the Company Law & Corporate Governance.
1. Directors are fiduciaries, i.e. empowered to oversee the management - to ensure that it is effective, honest, and dedicated to managing the company for the benefit of its shareholders and to enhance shareholder value.
2. Rules are largely common law and equitable rather than statutory.
3. As overseers, directors should serve as advisers, monitors, counselors, protagonists, and critics but not as bulldogs
Role of Independent Directors in Execution of the CSR Provisions as mandated ...CSO Partners
It covers the following topics
- Outline of the Company Act 2013
- Functions of Independent Directors
- Setting perspective and priority – formulating policy and framework
- Keeping a tab on the process-setting M&E system
- Keeping the Board engaged
- Review and audit
CH -11 CORPORATE GOVERNANCE AND OTHER STAKEHOLDERSBibek Prajapati
CH -11 CORPORATE GOVERNANCE AND OTHER STAKEHOLDERS
FOR CS PROFESSONAL, CA,CMA, MBA
Stakeholder Concept
• Recognition of Stakeholder Concept In Law
• Stakeholder Engagement
• Stakeholder Analysis
• Types of Stakeholders
• Caux Round Table
• Clarkson Principle of Stakeholder Management
• Governance Paradigm and Stakeholders
• Stakeholders provide resources that are more or less critical to a firm’s long-term success. These resources may be both tangible and intangible. Shareholders, for example, supply capital; suppliers offer material resources or intangible knowledge; employees and managers grant expertise, leadership, and commitment; customers generate revenue and provide infrastructure; and the society builds its positive corporate images.
• A director of a company shall act in good faith in order to promote the objects of the company for the benefit of its members as a whole, and in the best interest of the company, its employees, the community and the environment.
• Stakeholder engagement leads to increased transparency, responsiveness, compliance, organizational learning, quality management, accountability and sustainability. Stakeholder engagement is a central feature of sustainability performance.
• Primary stakeholders are those whose continued association is absolutely necessary for a firm’s survival; these include employees, customers, investors, and shareholders, as well as the governments and communities that provide necessary infrastructure.
• Secondary stakeholders do not typically engage in transactions with a company and thus are not essential for its survival; these include the media, trade associations, and special interest groups.
• Customers are considered as the king to drive the market and they can sometimes exercise influence by consolidating their bargaining power in order to get lower prices.
• The lenders put a check and balance on the governance practices of an organization to ensure safety of their fund and as a societal responsibility.
• The organization which builds a mutually strong relationship with its vendors improves its overall performance in the marketplace.
• The society provides the desired climate for successful operation of a company business. If society turns against the company, then business lose its faith in the eyes of other stakeholders be it government or customer.
Материалы с Международного ЭКОФОРУМА "Мир управления проектами". Презентация была представлена в секции "Стартапы VS Эксперты" Цели, дедлайны, ошибки и тренды
Презентация использовалась во время выступления Евы Бендарчик, спикера международного ЭКОФОРУМА "Мир управления проектами" и представила тему "Как добиться совершенства в проектах?"
The presentation was used during the Ewa Bednarczyk's speech, who was the speaker of the International ECOFORUM "World of project management" and present the topic "How to assess excellence in projects?"
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Opportunities for CAs as independent directors to enhance the credibility and...CA. (Dr.) Rajkumar Adukia
The concept of Independent Directors is a welcome step for corporate governance in India. Independent directors are expected to use their capacity, knowledge, and resources towards the maximization of stakeholders’ value and well-being. They ensure the progress of mankind through transparency, accountability, and truthful disclosure of the state of affairs of the company. The Companies Act, 2013 has conferred greater empowerment upon Independent Directors to ensure that the management and affairs of a company are being run fairly and smoothly.
Elizabeth Homes offered the world a miracle technology which would have changed medicine forever in the same beautiful package as many other Silicon Valley giants.
Role of board of directors -Corporate GovernanceRehan Ehsan
This Presentation states the role of board of directors in respect of corporate governance of Pakistan. Reviewing this clear the concept of their legal role in Pakistan.
the effect of independent directors on corporate governance using associatio...INFOGAIN PUBLICATION
The literature on corporate governance and various codes emphasis that the Board of directors should provide direction to the company, evaluate and approve strategies, appoint and remove the chief executive officer and decide the compensation for him and other members of the top management. While an Independent Director should focus on the adequacy and effectiveness of the internal control and risk management systems, they are expected to protect the interest of non-controlling shareholders, should be watchful to identify weaknesses and should act tough only when required. Despite Enron, World Com and Satyam’s Boards having many Independent Directors, their presence could not avert the major corporate disasters. The challenges of Independent Directors are many folds and growing day by day. The government expects Independent Directors to bring an independent judgment to bear on the Board’s deliberations especially on the issue of strategy, performance; risk management, resources, key appointments and standards of conduct and bring an objective view in the evaluation of performance of Board and management. The public outrage in many corporate failures suggests that there is a huge expectation gap between what Independent Directors can do and what stakeholders expect to do. This gap is created because all the stakeholders have hyped the role of Independent Directors under the code of corporate governance. In order to be effective, they need to understand they can effectively protect the interest of non-controlling shareholders even when the Board is devoid of certain critical responsibilities. This paper attempts to find out "the ultimate measure of Independent Directors not where they stand in moments of comfort, but where they actually stand and should stand at the time of challenges and controversy."
This eBook Board Governance for Private Business is based on the most common corporate governance questions we receive from private business owners. Most private business and family business organizations have Boards of Directors. However, the majority of private business Boards do not focus on corporate governance. At some point - often in preparation for an exit - these Boards explore the benefits of a governance Board and how to implement it. This eBook is a short read. Every page is an answer.
1. 1
Emerging Role of Independent Directors in the Board Room
From
N.ILAMARAN
Email Id : Maranind9@gmail.com
Mobile No :9741699055
2. 2
Contents Page No
1) Synopsis of Emerging Role of ID’s in Board Room 3
2) Project Objective and Goal to Achieve the Objective 7
3) Structure of Dissertation Project 8
4) Regulatory Compliance and Governance of ID’s 9
5) Role and Functions of Independent Directors 10
6) Duties of Independent Directors 11
7) Role of Lead ID and Liability of ID 12
8) Board Room Dynamics and Communication 13
9) ID’s Art of Board Room Communication 14
10) Independent Director and Communication Process 15
11) Independent Directors in Conducting Press Conference 16
12) Role of ID’s on ERM Framework 17
13) Responsibility of ID’s in Risk Management 18
14) Corporate Social Responsibility (CSR) 19
15) Emerging Role of ID’s-Building Tomorrow’s Boards 20
16) Financial, Legal Framework of Business 21
17) Role of ID’s with respect to Financial Analysis 22
18) Case Studies – Role of ID’s 23-26
1) Satyam Computer Services Ltd
2) I-Gate Hiring of Tainted CEO
3) Sahara Pawar-OFCD case
4) Fly Good Times –King Fisher Airlines
19) Maximizing Effectiveness of Boards through
Accountability and Leadership 27
20) Corporate Accountability 28
21) Key Takeaways for self in Emerging Role of ID’s 29-30
22) References 31
3. 3
Synopsis
In the Changing Business Environment the new paradigm of Corporate
Governance is evolving.
The Board of Directors is one of the most important governance mechanisms in
Modern Corporations. In principle, the Board is responsible for approving major
Strategic and Financial Decisions. It has access to privileged and timely
information about the firm, meets regularly to discuss this information and has a
fiduciary duty towards the Shareholders it represents.
The Role of the Board is to advise and monitor management and for that purpose,
the Board is typically staffed with distinguished individuals who have the required
skills and relevant experience and expertise to fulfill this role. The Degree to
which a Board can fulfill its function also depends on the quality of information
provided by the Management.
Board independence i.e. the proportion of directors who are classified as
“Independent Non-Executive Directors” has been increasing globally but the
levels of independence are much higher in the U.S (74%) than in the EU (34%)
Countries appear to matter for Board independence. Board regulations and
Business practices varies substantially across countries in the globe which could
explain the importance of country effects for Board independence. Firm size and
Firm performance are positively related to Board independence.
Several initiatives worldwide have been taken to drive Board Performance.
Regulatory changes have affected the composition, role and responsibilities of the
Boards Worldwide and stronger framework for Director’s fiduciary
Responsibilities have resulted. Consequently, Boards are trying to find a balance
between increased security and regulatory reforms imposed from outside and
efforts made by the Boards themselves
4. 4
Different Studies across the world so far has been conducted to find whether
independent directors actually contribute to firm performance or not and the
result is heterogeneous .Board independence is critical to an emerging market
that is subject to external shocks and may lack sufficient liquidity as well as
indigenous industrial infrastructure. The presence of outside directors improves
the quality corporate decision making even when they are not in majority.
The Primary Role of Independent directors is to protect the interest of non-
controlling or Minority shareholders as per the Regulatory framework proposed
by Companies Act 2013 section 149 and Section 49 of SEBI Act.
The independent directors are expected to discharge the duty of an arbitrator in
the interest of the company as a whole in situations of conflict between
Management and Shareholder’s interest. They should report concerns about
unethical practice, actual or suspected fraud or violation of company’s code of
ethics policy. Further, it is expected that the independent directors should
maintain professional integrity and business secrets.
Independent Directors should not hesitate to audit the strategy presented before
the Board for approval and ask uncomfortable question. This helps the promoter
to receive objective feedback on the strategy. Independent directors should focus
on the adequacy and effectiveness of the internal control and risk management
systems. Board must critically review the strategy implementation and operating
performance .Independent directors should not develop animosity towards the
promoter or the CEO. They should act as Friend, Philosopher and guide to Board
Independent directors cannot monitor the daily executive management. At best,
they can provide checks and balances and enrich Boardroom deliberations.
Therefore, each independent director should understand the Business well and
should have adequate knowledge to appreciate management issues. Independent
directors should not be held responsible for the misdeeds of the company
provided they have applied due diligence in carrying out their responsibilities.
There is a huge gap between what is expected from Independent directors and
what they can do in practice. Independent directors in enlightened companies
5. 5
improve enterprise performance by providing innovative solutions to the issues
that pull down the performance of the company. They through the audit
committee strengthen audit functions and risk management systems. They
usually stop decisions that directly hurt the interest of non-controlling
shareholders. And perhaps, that is what shareholders expect from Independent
Directors.
The ID’s can play the crucial role of bringing objectivity to the decisions made by
the board of directors by playing a supervisory role. While they need not take part
in the company’s day- to -day affairs or decision making, they should ask the right
questions at the right time regarding the board’s decisions. Raising the
appropriate red flags at the right time would help them in avoiding the
occurrences of unwanted situations and their consequences to a greater extent at
a later stage.
Globally with the evolving regulatory landscape, which makes them responsible
for the prevention and detection of fraud, directors have begun exercising
adequate oversight on the management of the risk of fraud .Non-Compliance with
these regulations or guidelines can have serious repercussions for Directors
including the reputational loss and personal liabilities.
For directors of organizations with operations spread across multiple countries,
the risk of non-compliance increases significantly as such organizations need also
to comply with global legislations such as Foreign Corrupt Practices Act (USA) and
the UK Bribery Act 2010
The role of ID’s in fraud prevention and detection has come under the direct
scanner of regulators, members and other stakeholders due to the recent
exposure of high profile instances of fraud in India. In the last few months we can
clearly see ID’s taking direct interest in reviewing the fraud risk management
framework put in place by their organizations to mitigate the risk of fraud.
The corporate Governance structure hinges on the ID’s who are supposed to bring
objectivity to the oversight functioning of the Board and improve its
effectiveness. However, the problem is that an ID cannot play an effective role in
6. 6
isolation despite their commitment to ethical practices. They cannot stop a
decision that is detrimental to the Board, but if the board acts collectively, the
company’s market perception can be held intact.
Independent directors may not be in a position to stop fraud at the highest level,
but with a high level of commitment and due diligence, they may be well placed
to identify signals which trigger the downfall of the company and violation of
regulatory compliance and erode the value of stakeholders.
In summary, Independent Director should self-introspect with following queries;
Do we set and communicate the right “Tone at the Top”?
Do we effectively assess our corruption risk with Policies and Processes?
What incentives do we provide for compliance and penalties for non-
compliance?
How do we monitor and audit to detect improper contact?
How do we review the effectiveness of our compliance program?
Independent Directors have to ensure the strategic guidance of the company, the
effective monitoring of the Board and the Board’s accountability to all the
stakeholders.
Regulatory Compliance, Corporate Governance, Prevention of Fraud and
Malpractices are to be priority areas addressed by Independent directors to act as
whistle blower in case of any abnormalities observed so that the company will
deliver its fiduciary duty to all the stakeholders with dignity and respect
Government of India and SEBI expects the emerging role of Independent directors
in the Board Room to be highly integrated ethics oriented professionals with
unbiased approach and keeping the interest of all the stakeholders to act
diligently in challenging times without compromising the principles and adhering
to the norms of Regulations to prevent Economic offences in the Society and also
to ensure Corporate Social Responsibility.
Emerging Role of Independent Directors in the Board Room
“Educate!! Empower!! Enlight!! “
7. 7
Project Objective
The Dissertation on “Emerging Role of Independent Directors in the Board Room”
aims to bring the conceptual clarity on emerging Board Trends and the duties and
responsibilities of Independent directors with Board Room dynamics and
communication and ensuring corporate social responsibility without
compromising the value of all the stakeholders and also mitigate the risk with
proper financial management.
Goal to Achieve the Objective :
Independent directors have to play the role in the Board Room with
experience and expertise by thoroughly understanding the business of the
company and gain in-depth knowledge of the industry by equipping
financial and legal skills
Play the role of a colleague as well as a “Cop” .No laxity in monitoring role
Educate the Board to realize their fiduciary obligations to the shareholders
and moral obligations to operate the company in a legal and ethically
responsible manner
Empower the Board to take informed and balanced decision making
Enlight the Board to look at the strategy with Long term perspective
Emerging Role of independent directors in the Board Room will enrich the
performance of the company by enhancing the value of all the stakeholders
without compromising Regulatory compliance, Corporate Governance by
innovatively devising and implementing strategies with systems and processes
The independent director also plays the role of a strategic advisor. Being an
independent expert, s/He can perceive the situation without prejudice and can
contribute unadulterated expertise and also to scrutinize the performance of the
Management. Thus, ID acts as the “Super Watchdog “for all the stakeholders by
ensuring transparency and accountability to the Board
Independent Director has to act as Innovative Developer to the Company by
constructively challenging the Board for more effective decision making
8. 8
Structure of Dissertation Project
Emerging Role of Independent Directors in the Board Room is introspected with
the following methodology
Regulatory Compliance and Governance
Board Room Dynamics and Communication
Enterprise Risk Management
Corporate Social Responsibility
Financial, Legal Framework of Business
Case Studies –Analysis and Role of ID’s to prevent Economic offences
Maximizing Effectiveness of Boards through Accountability & Leadership
Each of the above topics are discussed in depth to have a clear understanding of
the Emerging role of Independent directors in today’s corporate boards to ensure
the objectives of the company are met without compromising the ethical values.
Boards need to understand each other in terms of values, beliefs and purpose
Independent directors are best seen as “Empathetic” to management rather than
“Sympathetic”, they need to be quite challenging in their analysis and evaluation
of proposals put to the board. The success of the Board is largely a function of the
quality and diversity of experience and skills of the Independent Directors.
Independent Directors add value and bring balance on the board in terms of skills
and experience. They have a wider set of experience to bear on issues and
decisions in the company.
The responsibilities of Independent directors have intensified in recent years, and
need to devote sufficient time to perform their duties effectively in order to
balance the conflicting interest of the stakeholders.
In the end, every Independent director must remember and follow a quote by
Steve Jobs
“Don’t let the noise of others’ opinions drown out your own inner voice”
9. 9
Regulatory Compliance and Governance
The provisions relating to the appointment and duties of the Independent
directors are contained in chapter XI of the Companies act 2013 effective
from 1.4.2014 and SEBI amended clause 49 of the listing agreement
effective from 1.10.2014.
Guidelines for Professional conduct of Independent Directors
Uphold ethical standards of integrity and probity
Act Objectively and constructively while exercising his/her duties
Exercise his/her responsibilities in a bona fide manner in the interest
of the company
Devote sufficient time and attention to his/her professional
obligations for informed and balanced decision making
Shall not allow any extraneous considerations that will vitiate his/her
exercise of objective independent judgment in the paramount
interest of the company as a whole, while concurring in or dissenting
from the collective judgment of the Board in its decision making
Not abuse his/her position to the detriment of the company or its
shareholders or for the purpose of gaining direct or indirect personal
advantage or advantage for any associated person
Refrain from any action that would lead to loss of his/her
independence
Where circumstances arise which make an independent director lose
his/her independence , the independent director must immediately
inform the Board accordingly
Assist the company in implementing the best corporate Governance
practices
Independent directors must realize their fiduciary obligations to the shareholders
and moral obligations to operate the company in a legal and ethically responsible
manner. They should support those investments and decisions that serve the best
interests of the company, its employees, the shareholders, all stakeholders, and
the community and for the protection of environment.
10. 10
Role and Functions of Independent Directors
Help in bringing an Independent judgment to bear on the Boards
deliberations ,especially ,on issues of strategy ,performance, risk
management, resources ,key appointments and standards of conduct
Bring an objective view in the evaluation of the performance of the Board
and management
Scrutinize the performance of management in meeting agreed goals and
objectives; monitor the reporting of performance.
Satisfy himself/herself on the integrity of financial information and the
financial controls , the systems for risk management are robust and
defensible
Safeguard the interests of all stakeholders ,particularly , the minority
stakeholders
Balance the conflicting interest of all the stakeholders
Determine appropriate levels of remuneration of executive directors ,key
managerial personnel and senior management; Have a prime role in
appointing and where necessary ,recommend removal of executive
directors, key managerial personnel and senior management
Moderate and arbitrate in the interest of the company as a whole,in the
situations of conflict between management and shareholder’s interest.
In addition to the above, Independent Directors have to formulate and monitor
the performance of the following committees
Audit Committee
Nomination and Remuneration Committee
Strategy Planning Committee
Risk Management Committee
CSR Committee
In all the above activities, Independent directors give rich inputs which help in
taking decisions, be frank and forthright in expressing their views
11. 11
Duties of Independent Directors
Undertake appropriate induction and regularly update and refresh their
skills ,knowledge and familiarity with the company
Seek appropriate clarification or amplification of information and where
necessary ,take and follow appropriate professional advice and opinion of
outside experts at the expense of the company
Strive to attend all meetings of the Board of Directors and of the Board
Committee of which he/she is a member
Participate constructively and actively in the committees of the board ,in
which they are chairpersons or member
Strive to attend the general meetings of the company
Where they have concerns about the running of the company or a
proposed action ,ensure that these are addressed by the Board and to the
extent that they are not resolved insist that their concerns are recorded in
the minutes of the Board meeting
Keep themselves well informed about the company and the external
environment in which it operates
Not to unfairly obstruct the functioning of an otherwise proper Board or
committee of the Board
Pay sufficient attention and ensure that adequate deliberations are held
before approving related party transactions and assure themselves that the
same are in the interest of the company
Ascertain and ensure that the company has an adequate and functional
vigil mechanism and to ensure that the interests of a person who uses such
mechanism are not prejudicially affected on account of such use
Report concerns about unethical behavior, actual or suspected fraud or
violation of the company’s code of conduct or ethics policy
Acting within his/her authority ,assist in protecting the legitimate interests
of the company, shareholders and its employees
Not disclose confidential information ,including commercial secrets
technologies ,advertising and sales promotion plans ,unpublished price
12. 12
sensitive information ,unless such disclosure is expressly approved by the
Board or required by law
Role of Lead Independent Director
Identify the most critical issues for the Board to deal with
Assist the Board in achieving consensus on important issues
Play the role of a facilitator outside the board room especially on
contentious issues
Work with the CEO to prioritize the issues ,set the agenda and enable it
to focus on substantive issues
Ensure that Board conversations do not veer in the direction of certain
unwanted topics/individual preferences
Provide candid feedback to CEO ,CFO post an executive session
Independent Director’s Separate Meeting
Independent Directors shall hold at least one meeting in a year without
attendance of non-independent directors and members of Management
All independent directors will strive to be present at such meeting
The Meeting shall:
Review performance of non-independent directors and the Board as a
whole
Review performance of the Chairman of the company ,taking into
account the views of executive and non-executive directors
Assess the quality, quantity and timeliness of flow of information
between the management and the board, which is necessary for the
board to effectively and reasonably perform their duties.
Board Meeting Frequency and Compliance adherence
Board shall meet at least four times a year with a maximum time gap of
four months between any two meetings
Board shall periodically review compliance reports of all applicable laws
13. 13
Liability of Independent Directors
An Independent Director / A non-executive director not being promoter or key
managerial personnel ,shall be held liable ,only in respect of such acts of omission
or commission by a company which had occurred with his knowledge,
attributable through Board processes and with his/her consent ,connivance or
where he had not acted diligently
Board Room Dynamics and Communication
Need for Independent Director to have critical and creative Thinking
Mandatory Compliance Requirement ( Personal liability, Governance
pressure)
Rise in stakeholder’s Expectations
Wave of Corporate Frauds & Scandals
Changing Business landscape-Technology Evolution, mergers and
Acquisitions, Globalization
To play a strategic role –To provide input on strategic calls like business
growth and expansion, product diversification
Keys to Critical and Creative Thinking
Share and implement experience and best practice used by other Boards
Putting oneself as representative of various stakeholders
Enhance ability to draw conclusions /inferences
Deal in Business context
Recognize Assumptions – Ability to separate fact from opinion
Use the art of evaluating the Arguments
Recognize Relationships
Independent Directors can rely on a few well established and proven techniques
to develop critical and creative thinking
14. 14
Independent Director’s Art of Board Room Communication
Understanding How to navigate the power play that occurs in most
Boardrooms
Developing influencing skills to build solid interpersonal relationships
Maintain confidentiality while sharing information on best practice ,Market
developments and experience attained by attending Board meetings of
other organizations
Building a strong level of negotiation skills to assist Board’s strategy
The ability to counter resistance effectively thereby adding value to the
organizational objectives
Understand what motivates their fellow Board members
Build strategy that taps into the deeper dynamic of interpersonal
communications within the Board
Independent Director way of handling Whistle Blowing
Timely Review of Process ,system and Controls applicable
Ensure that “Whistle Blower “ is protected
Maintaining anonymity of the “Whistle Blower”
Separate genuine grievances from the malicious or frivolous Complaints
Unbiased and Fair Analysis of Complaints
Detailed Tracking of the Grievances
Monitoring Progress of Complaints
Commandments of Good Communication
Clarify Your ideas before Communicating
Examine the true purpose of Each communication
Be mindful ,while your communicate , of the overtones as well as the basic
content of the message
Take the opportunity , when it arises , to convey something of help or value
to the receiver
Communicate, not only to be understood, but also to understand
15. 15
Independent Directors and Communication Process
As per the latest amendments in clause 49 and the new companies’ act 2013, the
role of an independent director can be segregated in two broad areas
Interface and guardian of various stakeholders in the organization
Safeguarding the interest of all stakeholders, particularly the
minority holders
Harmonizing the Conflicting interest of all the stakeholders
Analyzing the performance of Management
Mediating in situations like conflict between Management and the
Shareholder’s interest
The role they play in a company , for the company ,broadly includes
improving corporate credibility, Governance Standards and the risk
management of the Company
Hence, Accurate and Timely Communication and participation in key
communication process, by independent directors is inevitable
BOARD AND
MANAGEMENT
INDEPENDENT DIRECTOR
VARIOUS
STAKEHOLDERS
COMMUNICTION
16. 16
Independent Directors- Conducting Press Conferences
A Press Conference is a voluntary presentation of information to the media. In a
press conference, Company decides what information to be presented, how it is
presented, and who presents it. It is an opportunity to get your story on TV, Radio
or in the paper
Independent Directors in the due course of discharge of their duties, have to use
methods to communicate to all stakeholders in the company. Conducting Press
Conferences is one of them. A press Conference is mostly held for dissemination
of communication about major events or announcements about the company
Independent directors represent practice of Good Governance. Presence of
Independent Director in the press conference bring forth confidence for the
investors and the Shareholders
When To Hold A Press Conference
When Communication involves all the stakeholders internal and external
When You have significant announcement to make
When you have to reach to large number in a short time
To show the strength of your company to the external world
To get widespread media coverage
Whatever organizational goals are, Company needs to have something
newsworthy to announce, reveal or talk about at your press conference
How to Hold a Press Conference
Define the Key Messages
Fix up a Schedule
Pick up the site/Venue and communicate in advance to all the stakeholders
Involve Media Partners
At the end of the Conference, Ensure Press Release statements are made
available to all the attended members
17. 17
Enterprise Risk Management –Role of Independent Director on ERM Framework
Every Enterprise necessarily faces risks in their day-to-day operations .These risks
may be known or unknown and could often affect the earnings and may
sometimes completely erode the capital and bankrupt the company itself.
Enterprise Risk Management (ERM) is the process of managing the activities of an
organization in order to assess, Monitor, Control and mitigates the effects of risk
on an Organization’s capital and earnings.
ERM provides a framework for risk management, which typically involves
identifying particular events or circumstances relevant to the organization’s
objectives (risks and opportunities), assessing them in terms of likelihood and
magnitude of impact, determining a response strategy and monitoring progress
By identifying and proactively addressing risks and opportunities, Business
enterprises protect and create value for their stakeholders, including Owners,
employees, customers ,regulators and Society overall.
ERM helps ensure effective reporting and compliance with laws and regulations
and helps avoid damage to the company’s reputation and associated
consequences. In summary, ERM helps an entity get to where it wants to go and
avoid pitfalls and surprises along the way.
ENTERPRISE RISK MANAGEMENT FRAMEWORK
RISK
IDENTIFICATION
RISK
ASSESMENT
RISK
QUANTIFICATION
RISK
MITIGATION
RISK
MONTORING
18. 18
Responsibility of Independent Directors in Risk Management
Independent Directors have a fiduciary duty to ensure that they discharge
their obligations to the company and the Board to the best of their ability.
Protect the company from risks and fraudulent activities
Comply with requirements of various regulations of the company
Independent Directors may be held liable in respect of any negligence
,default, breach of duty or breach of trust in relation to the company
Independent directors have to request the company to take insurance
policy to indemnify them against any liability for which they may be guilty
in relation to the company
Such insurance is not treated as part of the remunerations payable and also
allow the Director to arrange for defense in case of legal proceedings
Satisfy themselves on the integrity of financial information and financial
controls
Ensure that the Boards of organizations address their concerns about the
operations of their companies or actions proposed by them and also insist
that their concerns are recorded in the minutes of Board Meetings
Ascertain and ensure that companies have in place adequate and functional
vigil mechanisms and Monitor Risk Management committee
Report Concerns about unethical behavior, actual or suspected fraud or
violation of the codes of conduct or ethics policies of their companies.
Independent Director’s Guiding Principles
Reputation of the Company
Capability to meet the requirements and expectations
Demonstration of Independence
Whether the company has adequate controls and can be relied upon
Ability to resist pressure
Knowledge on current developments
Aware and abide by corporate code of conduct
Seek Expert help wherever required and whenever required
19. 19
Corporate Social Responsibility (CSR)
CSR is generally understood as being the way through which a company
achieves a balance of economic, environmental, and social imperatives
while at the same time addressing the expectations of shareholders and
stakeholders. This includes activities like promotion of education,
promotion of gender equality and empowerment of women, eradication of
hunger or poverty, Contribution of Prime Minister’s Relief fund
CSR as per the Companies Act 2013
As per Companies Act 2013, CSR has been Mandated
Section 135 of Act requires every company having a net worth of 500
crore or more or turnover of 1000 crore or more or a net profit of 5
crore or more during any financial year to constitute CSR committee
CSR committee will recommend CSR Policy for the amount of
expenditure to be incurred on various activities and monitor the
implementation of the policy
The Board of the company has to ensure that it spends ,in every
financial year ,at least 2% of the average net profits of the company
made during the three immediately preceding financial years.
Role of Independent Directors –CSR compliance Checklist
Does the company have a separate department /cell for CSR?
Does the company produce an annual sustainability /CSR Report?
How does the vision and mission of the company integrate with CSR?
How does the company propose to meet future economic,
environmental and social Changes and Challenges?
Who are the key stakeholders -
Employees,Customers,Suppliers,government,Community)
Have any special measures been taken to improve gender
representation in the organization, particularly among the
professional and technical staff?
20. 20
Emerging Role of Independent Directors -Building Tomorrow’s Boards
Business has changed as never before. Technology and
Globalization has changed the way we work.
The greatest change however is in public expectations of the
business. The obsession with bottom line profit and shareholder
value looks tired and no longer provides the stimuli for
leadership,motivation,innovation or brand equity
Stakeholders are questioning the very purpose of the organization
Building brands and not profits has become the focal point of the
corporate agenda
Tomorrow’s Boards will not take CSR as a Box ticketing Exercise
driven by External pressures or a PR Exercise. It has to be
embedded in Business practices
CSR will act as Insurance against Bad news. In Tomorrow’s
Business, Bad news will hit companies much harder than today.
Boards will be composed of Directors who using words of
Mahatma Gandhi, will live as if they are going to die tomorrow
and learn as if they were going to live forever.
Revolution of Boards from Structure -Based to Performance Based
Boards is the need of the hour in today’s Business World
Board of Directors presently need to know many aspects of the
Business realities which were earlier left to the specialists in the
operating organization with whom they had no contact and
therefore hardly any understanding.
In the closed model of the Economy, where the markets were
protected, they were hardly any compulsions to be accountable
and transparent.
In the Open model of the Economy, there are visible pressures on
corporate performance. Such pressure emanate from the diverse
range of stakeholders, Institutional Investors, Collaborators,
shareholders, Customers and Competitors.
21. 21
Financial ,Legal Framework of Business
Independent Directors to be familiar with the Following Financial Statements
Profit & Loss Account
Balance Sheet
Cash Flow Statement
Compliance of Financial norms:
Compliance of Company Law Provisions
Correctness of Accounts
Compliance with Accounting standards
Timely approval by the Shareholders
Ratio Analysis is a financial tool used to measure the relative health or sickness of
a Business. Financial Analyst measures the following Business Parameters
Liquidity
Profitability
Leverage
Efficiency in sweating of Assets
Useful conclusions drawn from Ratio Analysis in respect of
Industry Comparison (of Two Firms)
Trend Analysis (of Different periods of the same Firm)
When Financial Ratios are compared over a period of time, it is called Trend
Analysis
Investors, Lenders, Tax Authorities and Stock Market Analysts use the Financial
analysis ratios to understand the effectiveness of the firm to value their
stakeholders.
22. 22
The role of an Independent Director with respect to financial Analysis
Integrated Budgeting and Business Plan Validation
Defining MIS Report Framework
Review of Financial Reports for analyzing financial health of a company
External and Internal Audits and Control
Review of Information by Audit Committee
Report on Corporate Governance and Compliance
Legal Framework of Finance to be certified by CEO/CFO
CEO/CFO shall certify the Board that
Reviewed Financial statements and Cash Flow statement for the Year
Instances of Significant fraud of which they have become aware and
the involvement therein ,if any, of the management or an employee
having a significant role in the company’s internal control system
over financial reporting
The Independent Director is expected to get the expertise on
financial aspects of the Business as Finance is one of the most
significant areas where the possibility of Frauds can take place and
affects the shareholder’s interest like Sathyam and King Fisher
Airlines
The Directors are expected to hire external agency at the cost of the
company to better equip themselves to understand the financial
reporting before accepting the Board decision in order to safeguard
the professional interest and also the company’s image in Society.
The organization is also expected to share all the data transparently
in order to understand the basis of informed decisions so that the
purpose of Company act 2013 and SEBI regulations will yield positive
outcome on the Shareholder’s interest and protection
23. 23
Case Studies –Analysis and Role of ID’s to prevent Economic offences
Case I Satyam Computer Services Ltd
Satyam Computer Services Ltd caused loss to the investors to the tune of
Rs.14162 Crore
Inflating the revenue of the Company through false sales invoices and
showing corresponding gains by forging the Bank Statements with the
connivance of the Statutory and internal auditors of the company
perpetrated the fraud
The annual Financial statements of the company with inflated revenue
were published for several years and this lead to higher price of the scrip in
the market
In the process, Innocent investors were lured to invest in the company
Attempts were made to conceal the fraud by acquiring the companies of
Kith and Kin
Managing Director and Founder Mr.Ramalinga Raju jailed for 7 years and
fined 5 Crores in Satyam Scam
Role of Independent Director to prevent the Satyam scam
Review of Financial statements every year with Audit committee
Checking the Authenticity of Bank statements
Fair discussion with Founder and Audit Team PWC to transparently discuss
the issue and highlight the malpractices to the Board and record in MOM
Questioning the rationale behind acquiring a real-estate company which is
totally contra to the Software company
The timely steps as above would have helped to avoid the damage as
Satyam had a global presence and fourth largest major in software industry.
Promoters are always ambitious and aggressive to grow their Business but
the role of Independent Directors is to highlight the respect for the laws of
the land and allow them to perform with strict regulatory compliance. Such
an act would have protected the interest of minority shareholders as well
as Employees of the organization and Country’s pride in Global World
24. 24
Case II – i Gate Hiring of Tainted CEO
Mr.Murthy has been fired from Infosys as Senior manager on
Sexual harassment case subsequently.
He started his own start up Quintant Services which he
subsequently sold to igate and became the Boss.
Again, He landed into violation policy of not reporting the
relationship with a subordinate employee as per his
employment contract and He had to step down for the
violation of the policy.
Role of Independent Director in Igate Board
As a IGATE Independent Director on Board, The profile of all
the board members are to be examined
ID has to question the Board about the induction of
Mr.Murthy with a previously black mark in his career
This questioning at the initial stage would have prevented
hiring him at the first stage and later on re firing from igate
Zero tolerance towards Character assassination profile to be
adopted by Companies
Globalization demands ethical behavior from each and every
member of the organization and Character to be given
preference over competence in Hiring any executive
With Changing Scenario of Woman Director on Board, Gender
diversity, Professionalism coupled with behavioral discipline is
extremely important in today’s corporate world
The responsibility of Independent Director has to protect the
image of the company in all aspects for good corporate
Governance
25. 25
Case III – Sahara Pariwar –OFCD case
SEBI had filed case on Sahara group on various illegalities committed in
raising Rs.24000 crore from more than 3 crore retail investors
In 2008,Sahara Group (two unlisted Sahara group entities) Sahara India
Real Estate Corp (SHRECL) and Sahara Housing Investment Corp (SHICL)
through the private Placement Route for raising Optionally Fully convertible
Debentures from three crore investors all of whom are associated with
Sahara Group, approached two different ROCs
In 2009,when Sahara Prime city, one of the group companies approached
SEBI to go Public , the regulator suddenly asked SIRECL and SHICL to refund
all the OFCD Money to the investors .That is the starting point of Battle
Role of Independent Director in Sahara Board
Before Raising the Fund through OFCD, regulatory clarity and confirmation
to be ascertained from Sahara Group
Independent Director has to question why two different ROC’s are
approached for raising the OFCD
For unlisted company, who is the constitutional authority for giving
permission to raise funds from large investor base through OFCD whether
SEBI/ROC/MCA? clarity to be obtained before initiating the procedure
The rules required permission from SEBI for any issuance of securities to 50
or more investors, why it was not adhered to the regulatory compliance
before issuing OFCD?
The purpose and clarity of Fund raising has been well articulated or not?
Why SEBI received complaints stating the OFCD was raised on illegal
means?
Why SEBI asked to refund the Money to all investors?
The above type of probing by the independent director will help the company to
prevent major failure in regulatory governance at a later stage
26. 26
The objective of any fund raising activity has to be genuine and in the event of
failure, on the promoter, the relevant instrument has to be honored to the
investors as per the Regulatory Directions.
Case IV Fly Good Times –King Fisher Airlines
Started operations in 2005 King fisher Airlines had gone into troubles one
after another
To overcome 5/20 Rule, KFA bought low cost carrier in 2007
Management failure over LCC confusion and operation
Reduced the flights, Pilots and subsequently failed in all Regulatory
compliance of Service Tax and Payment of Salaries to Employees
The management failure was due to mounting debt of Rs.6000 crore and
operational loss of Rs.500 Crore in 2010
KFA’s accounts are frozen by Income Tax Authorities and got into legal
dispute with Airbus manufacturers
DGCA issues show-cause notice to Kingfisher to cancel the flying permit in
2012
License Renewal not done by DGCA due to non-receipt of revival plan by
KFA in 2013
Consortium of Banks demanded the repayment of loans with interest
Mr.Vijay Mallya was issued red corner notice by Govt of India
Role of Independent Director in King Fisher Airlines
Financial statements are not reviewed properly
Management Decisions are taken unilaterally without any discussion
Arrogance and Authority of Promoter was a real hindrance
Regulatory compliance was totally violated
Dynamics of Business is not managed properly
Acquisition of LCC to overcome 5/20 rule, ordering of A380 Aircraft without
landing permission from Govt are the major management failures
27. 27
As Independent Director, has to transparently highlight the above points and act
as a Watchdog to protect the interest of Banks which has provided Rs.6000 Crores
Maximizing Effectiveness of Boards through Accountability & Leadership
Corporate Leadership occurs when a company focuses ultimate success
from the strong leaders that run its daily operations
Balancing the need for increasing shareholder value while simultaneously
providing a work environment that truly engages the passion and
commitment of its employees
The greatest two single corporate leadership issues are lack of trust and
poor communication-Specifically communication regarding corporate
values, vision, mission and critical success factors.
Best Practices in Leadership Effectiveness
Build a collective vision, mission and set of values that help people focus
on their contributions and bring out their best
Establish a fearless communication environment that encourages accurate
and honest feedback and self-disclosure
Make information readily available
Establish Trust, Respect and peer-based behavior as the norm
Be inclusive and patient ,show concern for each person
Demonstrate resourcefulness and the willingness to learn
Create an environment that stimulates extraordinary performance
Elements of a Good Board Meeting
A clear, concise and focused Board agenda ,covering the right matters
Papers delivered in time containing relevant ,timely and accessible
intelligence in a style and format that enables appropriate analysis
Prepared participants and an effective meeting Chair
Relevant, Robust and Respectful Debate
Minutes that accurately record information and decisions that are finalized
promptly
28. 28
Diversity in the Board
Diverse membership on the board not only has a positive effect on Board
Governance ,but also leads to increased diversity in the organization
Diverse Teams deliberate better and make better choices
Diversity within the management team is fundamental for the return on
investment
The companies Act 2013 mandates the presence of at least one woman
director on the Board .This will pave the way in encouraging gender
diversity
Corporate Accountability
Accountability is the visible demonstration with evidence as to how
consistently ,closely and sincerely does a company follow the value systems
it lays out for itself
The accountability of the Board is to ensure that the right values are
debated, decided, documented, demonstrated and delivered by the
company in its dealings with every stakeholder
Corporate accountability typically implies that corporate behavior is
influenced by pressure exerted by social and governmental agencies
beyond the company itself
Companies Act 2013 has endowed responsibility and introduced high
standards for directors so that they are accountable to the shareholders for
their action and personally liable for any damage caused by them. But the
effectiveness of these provisions will depend on how strictly they are
enforced
After Enron Scam in US in 2002, Sarbanes-Oxley Act (SOX) was introduced
to protect the interest of the shareholders .Similarly after satyam case in
2009, Companies Act 2013 was introduced to prevent fraudulent acts of
corporates and protect all the stakeholders
29. 29
Key Takeaways for self as Emerging Role of Independent Director
Most of the time, Company offences are occurring due to the
aggression, ambition of the promoters to act without regulatory
compliance
Board and Audit Firms, institutional investors turn blind eye to the
promoter’s act rather than acting as regulator .Even though the
Board is equipped with necessary knowledge, they don’t want to
antagonize the promoter
Banks are also supporting for Promoter’s interests to meet their
targets. Banks also have to act as Watchdogs for the loans extended
to the companies with respect to their performance
Regulatory rules are ambiguities leading to debates at Courts at a
later stage by legal experts. MCA and ROC and SEBI have to bring a
clarity in all the rules and regulations in absolute clarity
Family owned companies and listed companies transform themselves
in a transparent and professional Board to bring Diversity and value
addition especially at times of Globalization of Corporate world
Emerging Role of Independent directors will be effective in case of all
support systems work in alignment rather than working in isolation
Independent Directors bring innovation in their approach to
maximize shareholder’s interest without compromising Regulatory
compliance
Independent Directors also ensure the organization’s objectives are
met with pride and dignity
Regulatory Governance and compliance, Corporate Social
Responsibility with good image of the organization is a prerequisite
for exceeding in Business Standard in national and international
corporate Business world
Govt of India has to be time sensitive and Business friendly and at the
same time without compromising the legality and understand the
30. 30
issues of the Business in a right perspective and allow the Companies
to grow so that employment objective also met with responsibility
Independent directors also visit US and UK and other best practice
global countries to understand their role and bring the value system
to all the stakeholders.
Govt also has to play a mechanism to induct independent directors
on company boards to act as Watchdogs to protect the image of the
country and interest of the stakeholders.
Unless Govt supports in time every time for all the permissions and
approvals, Companies also cannot effectively discharge their
obligations to the Society
Colorful data and presentations with graph alone will not help for the
organization to excel in their performance unless the Management
Board works with good spirit to protect the interest of all the
stakeholders
The complete success of the Companies act 2013 has to be jointly
achieved by Govt and Company as equal responsible partners to
meet the social obligations.
Discipline of Execution coupled with Transparency in process and
time sensitivity , corruption free environment, unbiased approach of
Regulator, Responsibility of Directors to ensure the interest of
companies, Customer Service and corporate social responsibility will
pave the way for corporate governance .
Last but not the least,
“Good Corporate Governance comes from Effective Regulatory Support”
“Transparency from Regulator and Company is a pre requisite”
“Regulator installs systems to award Good performance of Companies”
“Financial Institutions play a supportive role to conduct the Business”
31. 31
References
1) UK Corporate Governance Code -2012 Financial Reporting Council
2) Corporate boards in Europe –Gender Diversity-Danial Ferriera
3) Swedish Institute for Financial Research
4) Commission of the European Communities
5) Role of Independent Directors – CA Karthik,B Radia
6) Role of Independent Directors –KPMG and ASSOCHAM
7) Non-Executive Directors in Europe
8) Corporate Governance –Mr.Arpinder Singh
9) Corporate Governance and Board composition
A comparison of GCC Board with UK, EUROPEAN and US Boards
10) Corporate Governance –London Stock Exchange
11) Social dependence of ID’s in Europe’s large companies
12) Independent Directors in the Board-Mr.Abhishek Gupta