This article was written by Hemang Mohanlal Doshi, pursuing the Personal Branding Program for Corporate Leaders Course from Skill Arbitrage, and edited by Koushik Chittella.

Introduction 

Independent directors are the “watchdogs” of the corporate world, who are always striving to ensure that companies and promoters follow rules and regulations to protect the interests of investors and stakeholders. They manage the conflicting short-term interests of promoters and the long-term interests of investors while abiding by the ever-changing rules and regulations. The job is challenging and can be compared to the role of an umpire in a T20 cricket match or an undercover agent in hostile territory. Supervising a board of directors requires strict oversight and sharp business acumen.

Role of an Independent Director

The role of independent director was first introduced in the Companies Act, 2013; before that, it was just part of the listing agreement from SEBI. This role is introduced to add objectivity in the decision-making, i.e., independently, from the perspective of the company, minority shareholders, and even promoters. The primary intention of the role is to protect the long-term interest of the investors vis-a-vis the short-term interest of the promoters. A person who is known for integrity and has relevant experience and expertise, is not related to promoters directly, and does not have any pecuniary relationship can be appointed as an independent director.

Schedule IV of the Companies Act, 2013 has defined the following roles and responsibilities for an independent director:

1. Provide unbiased and independent judgement, opinion, and views during board discussions on strategy, performance, risk management, resources, and key appointments, and maintain high ethical conduct.
2. Bring objectivity when evaluating the performance of the board and senior management.
3. Review and monitor how management has performed on agreed goals and report on performance improvement.
4. As part of the audit committee, ensure that all financial statements reported are correct and, as such, report the current status of the company.
5. As a watchdog, he should protect the rights and interests of the minority stakeholders.
6. Maintain a balance between the expectations of various stakeholders and promoters.
7. Decide and support compensation for all executives based on performance, their appointment, and removal.
8. Act as a mediator in conflicts arising between various stakeholders.

Challenges faced and possible solutions

An independent director faces a mirage of challenges from the moment of joining a boardroom, including getting acquainted with the company’s business model and operation. Transparency, accountability, and upholding high ethical standards become obstacles too. Below are the key challenges and potential solutions that an independent director can adopt to ensure good corporate governance.

1. Lack of transparency in decision-making

Challenge: Being an independent director can sometimes feel like being asked to solve a puzzle with missing pieces and insufficient information.

Solution: Independent directors should work on gathering and collecting all the necessary information related to any issue to reach a well-informed conclusion. If needed, they should consult industry experts whenever possible.

2. Boardroom pressure from senior management

Challenge: Facing subtle pressure from management to align with their expectations is a common practice.

Solution: Independent directors should support each other in decision-making and ensure that they adhere to principles and ethics to ensure smooth operations of the company.

3. Legal liabilities

Challenge: The threats of mismanagement, oppression, and violation of legal processes can turn any director into a cautious cat.

Solution: Independent directors should be risk-averse in all legal and regulatory procedures mandated by the government. If necessary, they should procure indemnity insurance for the company.

4. Regulatory changes

Challenge: Keeping up with regulatory changes can be like catching a greased pig—a nightmare.

Solution: Independent directors should continuously keep learning and developing professionally through training and industry programs.

5. Schedule management

Challenge: Managing multiple commitments can turn a schedule into a circus act.

Solution: Independent directors should prioritise commitments effectively and ensure proper time management. Haste should be avoided in decision-making.

6. Boardroom meetings & dynamics

Challenge: Dealing with the internal politics of a boardroom is tricky, and handling this “family reunion” can be demanding.

Solution: Open and transparent communication can help build trust among board members.

7. Risk management

Challenge: Predicting hurricanes and identifying and mitigating risks can sometimes feel equally challenging.

Solution: Independent directors should emphasise the enterprise risk management framework. Risk should be identified for all business goals with mitigation plans.

8. Stakeholder management

Challenge: Meeting and balancing expectations of a pool of industry experts and stakeholders is challenging.

Solution: Independent directors should understand the perspective of all stakeholders and balance the expectation in the best interest of the company.

9. Ethical dilemmas

Challenge: Sticking to ethics while deciding who gets the benefit can be like sharing the last slice of pizza.

Solution: Independent directors should follow strong personal morals and adhere to established ethical guidelines.

10. Succession planning

Challenge: Leadership transitions are like preparing for a chess match without knowing the rules—daunting.

Solution: Independent directors should have a succession plan ready, and it should be reviewed regularly.

11. Performance review of the Board of Directors

Challenge: Conducting a performance review of the Board of Directors can feel like asking a chicken to vote for dinner party tonight—awkward.

Solution: Independent directors should conduct performance reviews tactfully and focus on highlighting growth areas rather than shortcomings.

Key challenges in board committee vigilance

Independent directors must be alert, mindful, and careful about the details and discussions during the exchange of information in the boardroom meetings. Independent directors should remain composed and committed to fact-finding and truth-speaking when preparing various reports and financial statements. Independent directors have to be vigilant on following committees.

1. Audit Committee:

Independent directors are expected to oversee the audit and internal financial controls of a company to ensure the integrity of its financial statements. If needed, external independent expert advice and consultation can be sought to prevent any financial misstatements and fraudulent reporting in quarterly and annual reports of the company. This will ensure the safety of investors and stakeholders in the long run.

2. Nomination and Remuneration Committee:

Independent directors have to ensure fair and transparent processes are followed in selecting, promoting, and compensating top executives. Their oversight will ensure to help retain talent in the company and contribute towards the growth of the company.

3. Risk Management Committee:

Independent directors should play a key role in identifying and mitigating top risks impacting business goals and helping in the long-term sustainability of the company. Their vigilance ensures potential risks are addressed early and opportunities are explored accordingly.

4. Corporate Social Responsibility Committee:

Independent directors should ensure that all the policies and activities undertaken by the company genuinely benefit society and are impactful in serving a cause. Their oversight should ensure that the legal obligations of the company are fulfilled wisely. 

5. Stakeholder Committee:

Independent directors should ensure that the grievances of stakeholders relating to transfer of shares, non-payment of dividends, issue of duplicate share certificates, etc. are handled cordially. Reporting of the grievances to SEBI and the registrar office should be done timely as per the legal processes.

6. Merger and Acquisition:

Though mergers and acquisitions are not typically managed by a committee, independent directors are supposed to be active rather than reactive in the transfer process. They are expected to be vigilant and cautious in obtaining independent valuation and creditors reports to ensure the safety and protection of minority stakeholders and the creditor’s interests.

7. Related party transactions:

Related party transactions fall under the jurisdiction of the Audit Committee, and independent directors play a key role in the process. Independent directors should carefully validate all the details and approve the transactions, taking into consideration the overall benefit of the company in the process. Favouring a few promoters and directors for personal benefits should be avoided.

Liabilities of independent directors

For any mishandling, misstatements, or any faults in their roles and duties, as per the Companies Act, 2013, Section 149(12), an independent director will only be liable for an act of omission/commission that has occurred with his knowledge, attributable to board processes, with his consent/connivance, or where he had not acted diligently. Further, under Section 164, independent directors can be disqualified under non-compliance. Under Section 447, any director involved in fraud is liable for imprisonment that can extend to 10 years and a fine that could be three times the amount involved in the fraud. Section 34 and Section 35 detail the criminal and civil liabilities in case of any misstatement in the issue of prospectus. In case of any oppression by the board, independent directors can approach the tribunal under Section 242.

Suggestions

The role and duties of independent directors are challenging and demanding in nature, as upholding high ethical standards requires more than just due diligence. Hence, independent directors should be granted the power of a supervisor over the boardroom. This special power and privilege would enable them to scrutinise the company with authority and complete independence as expected. This change is expected to be amended in the Companies Act, 2013, in the near future.

Conclusion

To conclude, the role of an independent director is that of an “watchdog”—an undercover agent who is vigilant from the onset of the boardroom. This article has covered the known challenges faced by the independent directors and offers potential solutions. Independent directors should also be aware of the penalties and fines levied by the SEBI and Central government in case of mishandling, misstatements, and faults in their roles and duties. By exercising due diligence and business acumen, independent directors can contribute effectively to the company’s board and achieve success.

References

• https://www.idbibank.in/pdf/Code-for-Independent-Directors-of-the-Bank.pdf
• https://www.linkedin.com/pulse/intricate-journey-independent-directors-challenges-solutions-nelson-1pnpc
• https://www.mca.gov.in/Ministry/pdf/CompaniesAct2013.pdf