INDEPENDENT DIRECTORS:

Independent directors have emerged as the cornerstones of the worldwide corporate governance movement. Their increased presence in the boardroom has been hailed as an effective deterrent to fraud and mismanagement, inefficient use of resources, inequality and unaccountability of decisions; and as a harbinger for striking the right balance between individual, economic and social interests. While presenting the Berkshire Hathaway 2002 report to shareholders, Warren Buffet criticized the performance of independent directors attributing their inability to participate to the extent of their potential to the lack of a conducive ‘boardroom atmosphere’ and the presence of ‘well-mannered people’ who were unlikely to raise a voice against the flow of the current. While Buffet reasoned that inadequacy of law was not the culprit, it cannot be denied that law is perhaps the only tool which can be used to tame this counter-productive boardroom environment. This paper shall study the concept of independent directors and their inter-relation within the corporate governance framework in India; their appointment, their envisaged role, their liability and the evolution of the concept in India and practical experiences. It shall attempt to outline the broad shortcomings of the current approach and make recommendations which include structural changes as well as a change in the attitude of corporate India.

SPOTTING INDEPENDENT DIRECTORS IN THE WIDER WEB OF THINGS:

With the Satyam fiasco still fresh in our memories, newspapers and journals have been abuzz with articles and reports proclaiming the need to strengthen our corporate governance systems day in and day out. Corporate governance is the new mantra; an old concept being pursued with a newfound vigour. The appointment and functioning of independent directors is part of a larger scheme to bring about more accountability into the working of corporations.

The fundamental purpose behind the appointment of independent directors is, so to speak, impartiality. Companies wish to identify directors who are capable of dispensing their duties without any conflict of interest in their judgment. To ensure this, there are certain guidelines which must be borne in mind while appointing independent directors. While a rigid definition would prove to be more detrimental than beneficial, the company must take a flexible stand in view of the prevailing circumstances to ensure that the following criteria are best met.

DEFINITION:

According to the indicative definition by the International Finance Corporation (‘IFC’), independent directors must fulfil certain prescribed minimum requirements. The standard which is sought to be established attempts to ensure the integrity of decision making; unhampered by circumstances extraneous to the interests of the company, i.e. they reduce the scope of interference by such circumstances.

The New Clause 49: Independent Directors Get a Boost:

In India, the SEBI monitors and regulates corporate governance of listed companies through Cl. 49 of the Listing Agreement. Influenced by the Sarbanes-Oxley Act of 2002 in the United States of America and the New York Stock Exchange regulations in 2003, SEBI launched a landmark initiative towards achieving higher corporate governance standards. SEBI issued of the Listing Agreement which was to apply to companies in a phased manner. It applied first to all Groups-A companies and then to other listed companies with a minimum paid-up capital of Rs. 10 crore/net worth of Rs. 25 crore and finally to companies with paid up capital of Rs. 3 crore/net worth of Rs. 25 crore. Later, SEBI amended the original clause and issued a new clause – 49 with several changes.

The new clause 49 lays down a more stringent qualification for independent directors than the old clause and took away the discretionary power conferred upon the board to decide whether the independent director's material relationship with the company had affected his independence apart from increasing the number of mandatory board meetings from 3 to 4. The minimum number of audit committee meetings was also increased from 3 to 4.

As already discussed, clause 49 lays down an inclusive definition wherein independent directors are those directors who do not have a pecuniary relationship with the company, its promoters, management or its subsidiaries, which may affect the independence of their judgment. This is in contrast with the British definition based on the Higgs report, which is an exclusive definition specifying who cannot be appointed as an independent director. The latter appears to be more appropriate as it clearly provides who is not acceptable as an independent director while the Indian definition seems too restrictive.

CONCLUSION:

The objectives of corporate governance cannot, perhaps, be as effectively met without the inclusion of independent directors in the larger scheme of things. This becomes even more compelling in the context of a burgeoning Indian economy with unprecedented amounts of funds flowing into companies from within and outside the country. With this growth of business interest, there is a rise in expectations that Indian companies would abide by the highest standards of corporate governance in a manner clearly demonstrable to the investors. There have been long standing demands for greater transparency in the functioning of Indian companies which are now being met with through various proposals, amongst which a greater role for independent directors has been a welcome change.