Role of Independent Directors - Company Act

In a recent news article published in the Hindustan Times dated 19th June “ Law to steer independent directors”

It’s an excellent step being initiated by the government to review the role of Independent Directors. In the Indian context, it is known that the many of the companies are controlled by the families and would like these to be handed over to their sons and daughters. The promoters may pursue interests that are not necessarily desirable from the point of view of the commercial success of the company. The promoters are all powerful making even the well qualified IDs, as in the case of Satyam having people like; Vinod K Dham, Mendu Rammohan Rao, Krishna G Palepu, Mangalam Srinivasan…, appear dwarfs and not of independence.

In most of the companies, it is the promoters who headhunt the independent directors – who are actually, friends, family members and even family lawyers, thus discouraging dissent in the board rooms and the board meetings are very cool and cozy and companies fail with respect to compliances for full disclosures and transparencies.

India’s corporate governance codes are on par with the best in the world what matters is keenness in implementation of these in practice. There are limits to legislations on corporate governance as a lot depends on the integrity and ethical values of various corporate players such as directors, promoters, executives and shareholders. The corporate governance is not only a “check-the-box” requirement but much more than to it.

Therefore, in the present situation questions are being asked ”Scrap the System of Independent Directorship in the Board?” - Is scraping of the system of IDs has the solution?
What are the role and responsibilities of an Independent Directors?
How far Independent directors have been successful in discharging their duties, looking at the recent episodes of ENRON, WorldCom, insider trading, subprime lending, Bear Stearn, SATYAM, Lehmans Brothers……?
Does the self regulatory mechanism has the solution?
How far SEBI or any other regulators been successful in controlling?

The role of the non-executive directors is to provide direction and oversight to ensure that the company protects and enhances the needs of the shareholders. They are the representatives of the shareholders but must represent every shareholder equally, never one type or group of shareholders.
The role of the independent non - executive is slightly more onerous than that of ordinary non - executives as they must also be completely free from any “conflict of interest”. It can be quite difficult when you are the only person in the boardroom who does not have a vested interest. Therefore, independent director must be sufficiently strong minded to withstand pressure, either overt or covert, to conform to the wishes of others. These are the ones, who are truthful, would stand up and face the corporate world, the weakling will resign, they are really not “qualified” to take up these roles. These breed of IDs, who are needed to be well supported by the system, who would manage to represent the shareholders' interests faithfully and well. The key issue is that, we are dealing with a social system in a confidential operating environment.
If the board is qualified, independent and ethical then one can achieve all the other attributes of good corporate governance. If the board is not qualified they may miss something, if they are not independent they may pursue other interests ahead of those of the company and if they are not ethical company will have trouble sooner or later even if they appear to provide the other attributes.
It is impossible for regulators to regulate so that only ethical and strong people get onto boards.
Furthermore, the shareholders will have to help themselves by ensuring that they question their directors at the AGM or in between, on the nature of behaviors in the boardroom:
• What skills each director brings to the board?
• How directors behave in the boardroom?
• What training needs were identified in the board performance review?
• What training has been delivered and what is planned?
• What specific governance/ director training do board members have?
Companies that disclose this sort of information are unlikely to recruit or retain a passive independent director. It is therefore, pertinent that the ethical side of directorship needs to be recognized and managed far more than what it currently is.
In view of the foregoing, it is a pertinent that a holistic system has thus to be evolved, involving all stakeholders, which would address all those aspects, which would achieve the best principles of corporate governance.