Independence of independent directors

Independent functioning of independent directors is a critical constituent of corporate governance for safeguarding the interests of minority shareholders, stakeholders such as employees and creditors, prevention of insider trading, abusive self dealing by promoters and board of directors and ensuring disclosure of interest of directors.

Clause 49 of the Listing Agreement of SEBI defines an independent director as a ‘non-executive director of the company who apart from receiving director's remuneration, does not have any material pecuniary relationships or transactions with the company, its promoters, its senior management or its holding company, its subsidiaries and associated companies and not related to promoters or management at the board level or at one level below the board'. Independent directors should be beyond influence and should have no characteristics, relationships or circumstances that may compromise the independent judgment and functioning.

SELECTION

Independent directors of the board must be appointed based on transparent, objective criteria and process. The code of corporate governance of a company may specify qualifications and attributes of an independent director. They must not only be independent according to the legislative and regulatory yardsticks but capable to take decisions independently without being influenced. Unlike an executive director who is normally a paid employee of a company, or a non executive director who is generally its promoter or has solid stakes in the corporate or nominee directors who are representative of lenders; independent directors are expected to balance the decision-making process of the board by constructively challenging the company's strategy, exercise due diligence and oversight responsibilities judiciously, function on the board as member and chairman across different committees.

A director shall not be a member in more than 10 committees or act as chairman of more than five committees across all companies in which he is a director. It is mandatory for every director to inform the company about the committee positions he or she holds. At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of the subsidiary company.

It is mandatory for the listed companies to establish Corporate Governance Committee, Compensation Committee, and Audit Committee composed only of independent directors. Listed companies must have internal audit, disclose corporate governance guidelines covering directors' qualification, responsibilities, access to management, compensation, succession, annual performance evaluation of the Board and mandatorily adopt a Code of Business Conduct and Ethics for directors, officers and employees.

NEW COMPANIES BILL

The proposed Companies Bill proposes segregation of the CEO and Board Chair roles, certificate of independence, constitution of nominations and remuneration committees, limits on the tenure and number of directorships, performance evaluation of the board of directors, committees and individual directors and independent directors to act as whistleblowers.

An independent director should possess the requisite business and industry expertise, be competent to work effectively like a team member as well as leader with the other directors of the board and committees, be available when the company needs the service and contribute in the board's deliberations.

There is a need to adopt a more professional, independent and transparent criteria for appointment of independent directors. Currently many of the Indian corporates, promoter families play a dominant role in the management and seldom do independent directors chair the board meetings. Chairmanship demands comprehensive knowledge of the business, demonstrated leadership qualities, capability to garner acceptance and support from the members of the board and devote full time service for the company.

(The author is Director-General, CAG office.)