Independent directors and their role in corporate

governance
[2019] 148 CLA (Mag.) 9
*
Susheela S Kulkarni
This article highlights relation of independent directors with the corporate governance along with the duties they may have towards the
stakeholders

Introduction
1. In India, the entity of independent directors (‘ID’s) was recognised with the introduction of corporate governance. The Companies Act, 1956
(‘the 1956 Act’) does not directly talk about ID’s, as no such provision exists regarding the compulsory appointment of ID’s on the Board.
However, clause 49 of the listing agreement, which is applicable on all listed companies, mandates the appointment of ID’s on the Board. A
need has been felt to update the Act and make it globally compliant and more meaningful in the context of investor protection and customer
interest.
The Companies Act, 2013 (the Act) mandates companies to have an independent director, a non-executive director, who helps the
company in improving corporate credibility and governance standards. The provisions relating to appointment, duties, role and
responsibilities of independent director are contained in section 149 read with rules 4 and 5 of the Companies (Appointment and
Qualification of Directors) Rules, 2014.
1.1 The need for the ID’s arose due to the need of a strong framework of corporate governance in the functioning of the company. There is
a growing importance of their role and responsibility. The Act makes the role of ID’s very different from that of executive directors. An ID is
vested with a variety of roles, duties and liabilities for good corporate governance. He helps a company to protect the interest of minority
shareholders and ensure that the board does not favour any particular set of shareholders or stakeholders. The role they play in a company
broadly includes improving corporate credibility, governance standards, and the risk management of the company. The whole and sole
purpose behind introducing the concept of ID is to take unbiased decisions and to check various decisions taken by the management and
majority stakeholders. An ID brings the accountability and credibility to the board process. These ID’s are the trustees of good corporate
governance.

Need to have independent directors on the Board

2. There are several distinct benefits that an ID can bring to a company, the first and foremost is that the internal processes that are can be
controlled, and the mismanagement or fraud which is being done by the company can be brought to the knowledge of the shareholders of the
company and to the public at large. It has some other benefits also, which include the following
• Offset the management flaws in a company
• Ensure the practice of legal and ethical behavior at the company, and at the same time strengthening accounting controls
• Increase the popularity of the company through his contacts and expertise so as to strengthen the share capital of the company
Be a part of long-term decisions which need to be taken, for the welfare of the company
• Help a company survive, grow, and prosper over time through improved succession planning through membership in the nomination
committee

What is corporate governance?

3. ‘Corporate Governance’ is a term with a very wide connotation, but in its most general sense, it means the system of rules, practices, and
processes by which a company is directed and controlled. It essentially involves working in the best interests of the company while balancing
the interests of the many stakeholders in a company. Since corporate governance also provides the framework for attaining a company’s
objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and
corporate disclosure. So essentially, corporate governance is the application of best management practices, compliance of law in its true spirit
and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable
development of all stakeholders.

Composition and structure of Board of directors under corporate

governance
4. For maintaining the unbiased objectivity of the decisions taken by the Board, it is necessary to take into consideration the views of all the
directors within the board, which are in a sense representing various groups of the company. Thus, the corporate governance regulations
provide a basis on the composition and structure of the Board.
By regulating the composition and structure of the Board the objectivity and soundness of the decisions taken by the Board are maintained. It
also ensures that no single director can dominate in such decision-making process, and thus reducing the chances of arbitrability of the
decisions. This can be done by including a sufficient number of non- executive members with appropriate competencies, who are
independent.
Independent directors and corporate governance
5. The need for the IDs can be established by the fact that they are expected to be independent from the management and act as the trustees
of shareholders. This implies that they are obligated to be fully aware of the conduct which is going on in the organisations and also to take a
stand as and when necessary on relevant issues. The importance of the role of an ID is of great significance. The guidelines, role, functions
and duties, etc., are broadly set out in a Code prescribed in Schedule IV to the Act. The Code lays down certain significant functions like
safeguarding the interest of all stakeholders, particularly the minority holders, harmonising the conflicting interest of the stakeholders,
analysing the performance of management, mediating in situations like the conflict between management and the shareholder’s interest, etc.
The IDs are also expected to attend the general meetings of the company and to keep themselves aware of the matters which are going on in
the company.

Role towards shareholders and stakeholders

6. IDs have various roles to fulfill in their official capacity. Following, are the most important ones:
• They must discharge their duties and must try to bring transparency in the working mechanism of the company. Since shareholders,
especially the minority shareholders, are usually not equipped to look into those affairs of the company, and, thus, they look forward to
independent directors so as to provide such transparency.
• When the management or Board is taking any decisions which would adversely affect the rights of the shareholders or creditors or
employees, then the independent directors must have a significant role in such decisions, and they must act in the welfare of the
stakeholders.
• Further, they are required to review the related party transactions and also to ensure the efficiency of “whistle blower ”
These, essentially, safeguard the interests of the stakeholders.

Role in committee membership

7. The Act provides for mandatory appointment of independent directors in following committees so as to meet the corporate governance
requirements:
• Nomination committee
• Remuneration committee
• Committee related to investor relations,
• Audit committee

Responsibilities of IDs for a good corporate governance

8. Being a member of the Board, their role and responsibilities are very much similar to any other director of the Board. The fiduciary duties of
care, diligence and acting in good faith apply equally to independent directors as to other directors.

Role towards the Board

9. It is the duty of the independent director to ensure that all those concerns that are important for the company are properly addressed by the
board of directors. The objectives and duties of the IDs are same as that of the executive directors. However, as compared to the executive
directors the time that is needed to be devoted by the ID and the degree of skill and care required for the company, both are less.

Liability of an ID
10. The Act lays down the liabilities of the independent directors and are limited only in respect of acts of omission or commission by a
company which had occurred with his knowledge, attributable through board processes, and with his consent or where he had not acted
diligently
Chief General Manager & Company Secretary, HOCL
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