Introduction
In theory, Independent directors are the core of corporate governance in companies. They are addressed as conscience keepers of the corporate India. But in reality? The record tells a different story- one where these "guardians" often remain silent spectators. Consider the boardrooms of Satyam, IL&FS crisis -- each scandal represents how systematic failures can hide in plain sight. These are not isolated lapses, they are evidence of a deeper malaise. Many Independent directors are neither truly independent and nor particularly effective. Often appointed by promoters and bounded more by etiquettes than accountability. And despite numerous regulatory tweaks by SEBI and the Ministry of Corporate Affairs which includes mandatory databank and stricter disclosures, Still the problem of empowerment of Independent Directors remains untouched: a culture that rewards and feeds loyalty over professinal oversight.
The Paradox of 'Independence'
The Independent directors are governed by range of legislations, rules and regulations stated in The Companies Act, 2013 and Securities and Exchange Board of India, particularly the listing obligations and disclosure requirements (LODR), 2015.
An independent director is a non executive director of a company who helps the company in improving corporate governance and strategic oversight. The independent director should not be a Managing director, Whole time director and a Nominated director .
Theoritically, It is mentioned that he or she should not have any relationship with the company that may affect the future judgements of Independent directors. The Companies Act 2013 and SEBI's LODR provide that an Independent director should not be a promoter, not materially connected to the company and someone who can bring an unbiased opinion and judgement in the boardroom.
But, in practice it is seen that 'not connected' to the company, does not mean 'not controlled'. As in practice, independent directors are nominated by the board and the committee. The nomination and renumerations committee shortlists and propose the candidates and the board then reviews and approves the nominees.Thus, it results in forming the board with people who will be inclined to promoters interest. And it may also evolve the fear of reprisals , that directors who object the actions of promoters may face risks of removal from the board.
Accountability without power
After the IL&FS crisis several independent directors faced intense scrutiny. The crisis revealed several government lapses and Independent directors were accused of not fullfilling their duties.
Even though it is highly acknowledged that the crisis was a result of weak internal control and lack of transparency. Independent directors were expected to be aware of the industry, and act with prudence and independence.The question that arises here is, were they truly responsible or merely the most vulnerable link in the governance chain?
The law imposes several duties and responsibilities on the Independent directors enshrined in section 149 of the Companies Act, 2013. Independent director is expected to act as a moderator in a sitaution of a conflict between shareholders interest and the management. S/he is required for oversight of financial reporting, to provide integrity of financial information and records of the company. An independent director is also entitled to bring about objective view and unbiased judgement in the boardroom. Thus, and Independent director is expected to look after the corporate governance in the company, and bring about the faults with full transparency and accountability.
But again the loopholes exist, as most Independent directors don't have influence over the internal culture of the company as they might be percieved as outsiders.
Independent directors lack on unfiltered access to operational data. As the information they rely on is provided by the business, internal and external auditors who are employed by businesses but chosen by the board of directors. Thus, the requirements placed on independent directors are fundamentally not correct as they lack the very means of the fiduciary obligations that they are expected to perform.
And insuffient information can result in hampering the transparency in decision making process.
Independent directors are expected to provide an independent and unbiased judgement to the baordroom and adhere to the principles and ethics to ensure smooth functioning of the corporate governance.
But in practice, there is always some subtle pressure on the independent directors to align with the interests of the other board members. There is a fear , that if they do not align with the interests of board, it might cost them their position. And if there is existing conflicts amongst the board members then the Independent directors are most likely to get affected. As they are already in this constant battle of giving fair, unbiased and independent judgement and protecting their positions in the company.
Are Reforms Cosmetic?
over the years both the Ministry of Corporate Affairs and Securities and exchange board of India have made attempts to strengthen the framework around Independent directors. These include:
- Mandotory Separate Meetings for Independent Directors
This meeting is held once a year by the independent directors of a company without the presence of non-independent directors and management personell. All the independent directors should thrive to be present at this meeting. This meeting is to discuss the matters related to companpany's governance and performance without any potential conflict.
- Code of Conduct
Section 149(8) of the Indian Companies Act 2013, provides that companies and Independent directors must abide by the provisions outlined in Schedule IV, which establishes the code of conduct for the Independent directors. These provisions ensure the integrity and independence of Independent directors in fulfilling their roles.
This code serves as a guide for professional conduct of Independent directors.
- Disclosure of Dissent
It is essential for the Independent directors to present any dissent from the collective judgement of the board. This involes recording the dissenting opinions in the meeting minutes and presenting them in conpany's annual report, according to the corporate governance practises and SEBI Guidelines.
- Declaration of independence
The declaration of independence is a statement made by an Independent director confirming they meet the criteria of independence as defined by the Conpanies Act,2013.
- Evaluation Mechanism
The performance measurement of board of directors shall be done by the entire board of directors exluding the director, being evaluated. On the basis of the performance report it shall be determined whether to extend the term of appointment of independent director.
But why these tweaks fall short?
Despite these updates, there is a faulty mechanism that exists in the entire process. These includes, Firstly, Even though the independent directors must be approved by the shareholders but the appointment and approval of the Independent directors is still dependent on the nominations made by the board and the committee. And the removal of Independent directors is done by the process of ordinary resolution passed at the general meeting.
Secondly, The evaluation of Independent directors is also made in the presence of entire board members only excluding the member being evaluated.
Thirdly, The disclosure of dissent mentioned above is only an ecouragement made by SEBI. And only suggestions have been made by regulators and experts to mandate making dissents by the Independent directors.
Thus, even though it is stated that the Independent director should not have any kind of relationship with the company but, in practice, the entire working of independent directors from appointment to removal, is influenced by board members only. And this influence results in the working of Independent directors, ensuring transparency, holding management accountable and providing objective advice to the board.In essence, they are expected to bite the hands that feed them, which is a structural contradiction.
Conclusion
Independent directors were meant to be corporate conscience keepers, but they risk becoming a decorative compliance officers. Until we align Independence with empowerment they will remain governance ghosts - visible on paper but invisible in practice. Independent directors need more empowerment to ensure they can effectively serve as checks and balances in the management system, protect shareholders interst and promote transparency in corporate governance. They need to be given actual powers and encouragement to fundamentally operate the fiduciary obligations vested in their hands.
References
The Companies Act, 2013 , Section 149 and Schedule IV
Economic times
SEBI(Listing obligations and disclosure requirements) , 2015
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