In this blogpost, Harsha Jeswani, Student, National Law Institute University, Bhopal analysis the concept of independent director

INTRODUCTION

With the rise of unscrupulous practices by a company, the government felt the need to introduce various remedial measures to prevent corporate larceny. One of such methods is to continuously raise the standard of Corporate Governance. With the rising level of corporate governance, the concept of independent directors has gained momentum in recent years.

The board of directors occupies a core position in the corporate governance. Shareholders in a company appoint a board of directors who are empowered to supervise management and ensure that all activities are performed in the best interests of the company. Among these directors, the companies now are appointing directors who work on an individual basis. The presence of independent representatives on the board who are capable of opposing the decisions of the management plays a significant role in protecting the interests of shareholders as well as other stakeholders. Because of this very reason, the word ‘independence’ has become such a critical issue in determining the constitution of any board and being a huge helping hand in the area of corporate governance.

CONCEPT OF INDEPENDENT DIRECTORS

An independent director plays a very important role by often challenging various policy decisions and strategies of the company which are not in conformity or are against the interests of the company. They also examine the working of the management and hold them accountable for their actions. Because of lack of affiliation which otherwise might prejudice their decisions, their independence enables them to accomplish these tasks more efficiently and effectively. Even though they are accountable for the acts of the company, they are less likely to be affected by self-interest in these actions. This makes possible for them to question the practices of the company. It is because of this advantage; the independent directors are often viewed as “adversaries” within the board. With the passage of time, their position has become more relevant and acceptable since these independent directors create a balanced environment in a corporation.

The need for Independent Directors gained popularity in India after various corporate scandals were reported, the major one being the Satyam debacle in the year 2009. Satyam case was perhaps the biggest corporate fraud case where M/S Satyam Computer Services Ltd caused loss to the investors to the tune of Rs. 14162 crores. The brief facts underlying the cases are- The owner of the company Ramalinga Raju along with his family members obtained illegal gains amounting to Rs. 2743 crores by various fraudulent acts. The false sales invoices of the company reflected the inflated revenue of the company. Further, the false bank statements showed corresponding gains with the connivance of the Statutory and Internal Auditors. The annual financial statements of the company with increased revenue were published for several years which further led to the higher price of the scrip in the market. All these false activities of the company lured the innocent investors to invest in the company. Several attempts were made to conceal the fraud by acquiring the subsidiary companies of relatives. In order to avoid such corporate frauds in the future and to protect the interests of the investors, particularly the minority shareholders the concept of Independent Directors was introduced.

The Companies Act, 2013 was introduced with the objective of improving the standards of Corporate Governance and ensuring transparency to the minority shareholders. The provisions relating to Independent directors have been included in the 2013 Act. The term Independent Directors has been defined in Section 149(6) of the Act and Section 149(12) deals with the liability of such directors. Section 150 lays down the procedure for selecting Independent Directors. The code for Independent Directors has been provided in Schedule IV of the said Act. All these provisions pertaining to independent directors were added because of the view that the inclusion of independent director often brings a different point of view, a more knowledgeable view, and a more professional view.

ROLE OF INDEPENDENT DIRECTORS

Independent Directors have a significant role in the field corporate governance. The progress of any company depends on the key role of these independent directors. In fact, Independent Directors act both as a safeguard and a source of competitive advantage. The earlier law of 1956 did not provide for any duties of Independent Directors namely the executive directors, the promoters, or the shareholders, minority or otherwise. Independent Directors act as a watchdog to ensure that the promoters and executive directors of a company carry on the activities of the company in accordance with the interests of the shareholder. Also independent directors act as advisors to the board, critical to maximizing revenue and overall value of the company.

The primary function of independent directors is to adopt the role of supervisor to monitor that the assets of the company are used only for the company.  This includes:

1. to be aware of the business in which the company is dealing and be familiar with various activities of the company,
2. inspect the accounts of the company,
3. calling for additional information where the accounts show less than the actual picture,
4. to supervise the policy decisions and the strategies of the company bearing in mind the interests of the company,
5. attending board meetings to ensure ability to generally monitor of corporate affairs and policies and
6. participating in the appointment, assessment and remuneration of directors generally.

CONCLUSION

Thus, the Satyam scandal and other corporate scams exposed the growing need for introducing the concept of independent directors in corporate governance. The 2013 Act defines the role of independent directors in accordance with the growing needs of the economy. The primary role independent directors play is not to protect the interest of the minority shareholders, but to supervise the activities of the board and to supervise the management of the company. The duty of the independent director is to look into the affairs of the company. It can, therefore, be said that indirectly the independent directors play a significant role in promoting the best interests of minority shareholders; when in fact the reality is that it is promoting the interest of all shareholders as a whole.