This article has been written by Anjali Yadav pursuing a Diploma in US Corporate Law and Paralegal Studies course from LawSikho.

This article has been edited and published by Shashwat Kaushik.

Introduction 

Gatekeepers of governance play a significant role in maintaining effective corporate governance. They possess a responsibility to safeguard the interests of stakeholders, including shareholders, employees and the public. These gatekeepers can be both internal and external, and they include auditors, lawyers, directors, regulators and other professionals.

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Usually, NEDs have the same legal duties, potential liabilities, and responsibilities as their executive counterparts. They are put on the same level when fulfilling their roles on the board of directors. In fact, all the directors should possess a broader perspective on corporate and business matters. However, NEDs are specifically selected for their independence, initiative, calibre and specific personal qualities.

Who are NEDs

Non-executive directors (NEDs) are independent members of the board of directors. They look after sensitive cases like executive pay, contribute to policymaking, and monitor the actions of executive directors for the protection of the interests of stakeholders. NEDs ensure compliance with the requirements of corporate governance.

NEDs also play a role in setting the company’s strategic direction and providing guidance to the executive team.

There are a number of important responsibilities that NEDs have, including:

  • Overseeing executive compensation: NEDs are responsible for ensuring that executive compensation is fair and reasonable. They also need to make sure that executive pay is not excessive and that it is aligned with the company’s performance.
  • Contributing to policymaking: NEDs should provide input on the company’s strategic direction and help to develop policies that will help the company achieve its goals.
  • Monitoring the actions of executive directors: NEDs should monitor the actions of executive directors and ensure that they are acting in the best interests of the company. They should also be prepared to take action if they believe that the executive directors are not acting in a responsible manner.
  • Ensuring compliance with corporate governance requirements: NEDs should ensure that the company is complying with all applicable corporate governance requirements. This includes requirements related to financial reporting, risk management, and internal controls.

NEDs play an important role in ensuring that companies are run in a responsible and ethical manner. They provide oversight of the executive team and help to ensure that the company is meeting its strategic objectives. NEDs also play a role in protecting the interests of stakeholders, such as shareholders and employees.

NEDs (non-executive directors) can also be seen as senior executives within the group companies of promoters and majority shareholders.

Their expertise and experience in the field make them the most eligible and valuable members of the board.

Appointment and remuneration

Section 152 of the Companies Act, 2013 states that for the appointment of NENIDs, they need the approval of shareholders through an ordinary resolution. According to sections 164 and 167 of the act, they may also go through disqualification and vacation of office, respectively. Their remuneration can be in the form of sitting fees for attending meetings, commissions based on net profit, or fees for any professional services given to the company. In cases of loss or inadequate profit, their remuneration may go under the limitation specified in the 5th schedule of the act. Where a situation arises in which a NENID on the board of a listed company gets remuneration exceeding 50% of the total remuneration payable to all NIDs, the approval of shareholders is required for such payment.

Role and responsibilities

The basic duty of NEDs is to provide creative contributions and improvements to the boards. They don’t get involved in the day to day management of a company but they keep their eyes on executive activities . They are also known as external directors.

They are included to bring:-

  • Independence
  • Special knowledge
  • Wide experience
  • Impartiality
  • Personal qualities to the board

They provide a valuable viewpoint and expertise to the board, which helps in the decision-making process of the board.

They have a better impact on the board’s balance, commitment, perception and perspective. They come up with the board’s strategic direction, efficiently solving problems, communicating with third parties, ensuring the meeting of audit requirements and participating in remuneration and board appointments.

Because they are well-versed in the operation and strategic objectives of the business, they play a vital role in improving the quality of board and committee meetings.

Role in the NRC

NENIDs (Non executive non independent directors) can effectively communicate the perspective of promoters or majority shareholders pertaining to the appointment of the CEO and CFO to the Nomination and Remuneration Committee (NRC)  members.  The promoter’s backing adds credibility and influence to the decision-making process for the NRC’s recommendation to hold weight in general meetings. NENIDs play a vital role in ensuring alignment between the Nomination and Remuneration Committee (NRC) and the promoter or majority shareholder, especially in important fields such as succession planning for key positions such as MD/CEO/CFO. They provide valuable feedback on performance and have a crucial role in replacing underachieving CEOs in group companies.

The board of directors is responsible for hiring and firing the CEO, and they often rely on the input of the executive committee to make these decisions. The executive committee is made up of the top executives in the company, and they have a unique perspective on the company’s performance and the strengths and weaknesses of the CEO. The board of directors will often defer to the executive committee’s recommendation when it comes to hiring or firing a CEO.

The executive committee also plays a role in developing the CEO’s performance goals and providing feedback on their progress. The CEO is responsible for achieving the goals that are set for them by the board of directors, and the executive committee can help to ensure that the CEO is on track to meet those goals. The executive committee can also provide feedback on the CEO’s performance, and they can recommend changes to the CEO’s strategy or approach.

The executive committee plays a vital role in the governance of a company. They provide valuable feedback on performance, and they have a crucial role in replacing underachieving CEOs. The executive committee can help to ensure that the company is managed effectively and that the CEO is held accountable for their performance.

Role in the audit committee

NENIDs (Non-Executive Non- Independent Directors) provide important insights into the Audit Committee’s discussion by elaborating on the business reasoning behind related party transactions (RPTs) and inter-corporate investments. Because of their extensive knowledge of the group, NENIDs can effectively convey the synergies, economies of scale, and overall commercial justification for proposed RPTs within the group.

Mediator between the management team, controlling shareholders and independent director

NENIDs (Non executive Non independent directors) play an important role in developing a strong and positive relationship between executive directors and independent directors as neutral arbitrators. MD/CEO or other WTDs appreciate the advice of NENIDs when they control the perspective of majority shareholders. NENIDs have a big role in ensuring everyone has equal access to important information and promoting transparency and alignment. These can be seen in various ways:-

NENID’s input on the right issues is highly appreciated by the management team, as it offers valuable insights into whether the majority shareholder would support it.

The NENIDs play an important role in:

  • Expressing their perspective on merits and demerits or advantages and disadvantages of significant acquisition offer to the promoter or majority shareholders.
  • Relaying the promoter’s point of view on the proposal to the management team.

Key responsibilities

These are some key areas where NEDs play a vital responsibility:-

  • In the development of a strategy, challenging and providing input.
  • They examine management performance and where necessary, they assist with succession planning.
  • NEDs fetch important external contacts and opinions to grow the effectiveness of the corporation and the board.
  • They play a crucial role in ensuring the accuracy of financial information, financial controls and risk management systems. 

Fiduciary duties

According to Section 166 of the Act, all directors, including NEDs, are under fiduciary obligation. But some people assert that NENIDs have a fiduciary duty to its promoter or majority shareholder who nominated them. The Rolata judgement has made it clear that every director’s fiduciary duty is primarily towards the company. So, the NENIDs have to work in the best interest of the company and the stakeholders. Well, being part of the company should be prioritised. 

However, it is important to prioritise being part of the company. This means that NENIDs should always act in a way that is in the best interests of the company, even if it may not be in the best interests of the stakeholders. For example, if a stakeholder requests that the NENID do something that would harm the company, the NENID should refuse to do it. This is because the NENID’s primary responsibility is to the company, not to the stakeholders.

There are a few reasons why it is important for NENIDs to prioritise being part of the company. First, NENIDs are employees of the company, and as such, they have a duty to uphold the company’s values and interests. Second, NENIDs have access to confidential information about the company, and they have a responsibility to use this information responsibly. Third, NENIDs are in a position of trust, and they have a responsibility to act in a way that is consistent with that trust.

It is important to note that prioritising being part of the company does not mean that NENIDs should ignore the interests of the stakeholders. NENIDs should always try to find a way to balance the interests of the company and the stakeholders. However, if there is a conflict between the two, the NENID should always prioritise the interests of the company.

Liability

According to regulatory architecture and the judiciary, Non-Executive Non-Independent directors are also independent directors in terms of liability. Section 149(12) gives equal immunity to these directors as independent directors. Various liability clauses and various other statutes governing corporate offences put them at the same standard as the other directors. 

In case of any act or omission, they are equally responsible as other directors, and they cannot say that they are only obeying the directions of majority shareholders.

In a ruling by Madras High Court, the Court has held that if there is a case of a pharmaceutical company in which the company is producing sub-standard drugs, then NEDs shall be equally responsible even when they are not involved in the day-to-day affairs of the company.

Challenges and reforms

NEDs don’t appear in day-to-day management but they provide oversight and strategic guidance with the help of their expertise and experience in the field. Some challenges that they may face include ensuring effective corporate governance, managing conflicts of interest, staying updated on industry trends and balancing stakeholders’ interests. These challenges should be faced with integrity and professionalism.

Less control of things

As they are not working in day-to-day management, they cannot have as much control as others have on boards. It would not be easy to sit back in decision and policy-making, even when you have important inputs to provide. However, their suggestions can make a huge difference even when they are not involved in day-to-day management.

NEDs are part of organisations, but at the same time, they are separate and distinct. Other than working in a team, they provide only their advice and opinions.

Conclusion

If NENIDs disagree with the decision of the board, it will only be recorded in the board or committee minutes and not  disclosed to stakeholders. For better protection of stakeholders’ interests, it shall be beneficial to alter the Act and make it mandatory for companies to disclose any dissent recorded by NENIDs in the director’s report for the financial year. This will increase transparency and accountability. It will be beneficial if the regulators can set some visible and objective boundaries for estimating the performance of NENIDs. These boundaries can provide a strong foundation for the NRC to effectively estimate the performance of NENIDs. This will ensure transparency and accountability in the estimation process.

It will be really helpful to alter the Act and to prepare a dedicated code for NENIDs, similar to the code of the Independent Directors. This code can provide comprehensible directions for their professional conduct, define their roles and functions and establish a clear process to share information with the controlling shareholders. A separate code of NENIDs will ensure their responsibility and actions are well-defined and consistent. The role of each director comes with its own set of challenges; they contribute  important insight to help the company thrive.

References

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