The role of Independent Directors has come into the limelight in India recently amidst Tata Sons – Cyrus Mistry spat.
It would be interesting to see who is an independent director and what is expected of such person.
Section 149(6) of the Companies Act, 2013 (“the Act”) provides a detailed definition in this regard. An independent director, in the opinion of the Board, has to be a person of integrity and possessing relevant expertise and experience. Further, an independent director must not have a material or pecuniary relationship with the promoters or the subject company or any specified related persons or entities.
The Act mandates all listed public companies to have at least one-third of the total Directors to be independent. Certain other categories of unlisted public companies too are required to have at least two directors as independent directors.
The eligibility criteria for an independent director seeks to ensure certain high ethical standards of integrity and avoids any potential conflict of interest.
The Act mandates all the independent directors to meet at least once in a year without the attendance of other directors, inter alia, (i) to review the performance of non-independent directors, chairperson and the Board as a whole; and (ii) assess the quality, quantity and timeliness of information flow between company management and the Board that is necessary for effective and reasonable performance of their duties.
The Act also requires appointment of an Independent director as a member or as a chairperson in various committees.
Further, an independent director is expected to abide by the provisions specified in Schedule IV to the Act. This Schedule, inter alia, stipulates the following:
- Guidelines of professional conduct for independent directors
- Role and Functions of Independent directors
- Duties of independent directors
- Manner of appointment, reappointment, resignation and removal of independent directors
- Mechanism for performance evaluation of independent directors
Independent directors are expected to play a vital part from corporate governance perspective.
However, there is a feeling that independent directors are by and large sympathetic to and on the side of promoters, whenever there is a requirement for them to take a tough call. This leaves minority shareholders (for whose protection this category has been created for, ironically) high and dry. Technically independent, but not really !
Part of the problem is that an independent director cannot have an effective role in management despite their integrity and ethical practices. They do not participate in a company’s day to day business nor in decision making on all issues.
However, as a collective pressure group, they may be better placed to identify potential pitfalls and red flag the issues at Board level. They must question the Board at appropriate times regarding proposals and decisions likely to have significant impact. They need not be bloodhounds but must play the role of watchdogs for the sake of good governance and benefit and confidence of non-promoter investors, minority shareholders and regulators. They must act as a check and balance on the acts of the board and management of the company.
Unless they do it, having them on the Board does not serve the purpose at all.
About the author :
Bhumesh Verma is a Corporate Lawyer with over 2 decades of experience in advising domestic and international clients, with a place in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters. He can be reached at firstname.lastname@example.org.