Who is an independent director?
The Companies Act, 2013, defines an independent director of a company as a person who does not have any material or pecuniary relationship with the firm, or its directors and promoters. The independent director cannot be a managing director, a whole-time director or a promoter of the firm or its subsidiaries. It essentially means that companies cannot appoint family members or friends of promoters as independent directors.
What are the qualifications of an independent director?
An independent director is required to have appropriate skills, experience and knowledge in one or more fields of finance, law, management, sales, marketing, administration, research, corporate governance, technical operations or other disciplines related to the company’s business.
How are independent directors appointed?
The Companies Act, 2013, says that one-third of the directors on board of every public-listed company must be independent directors. The Securities and Exchange Board of India (SEBI) norms also require the same of any listed company where the chairman of the board is a non-executive director. In case the company does not have a regular non-executive chairman, the SEBI norms specify, at least half of the board should comprise independent directors.
Independent directors are appointed by passing a resolution at the general meeting of shareholders. Under the current norms, a person cannot serve as an independent director in more than seven listed companies. A person who serves as a whole-time director in a listed company cannot serve as an independent director in more than three listed companies.
What is the tenure of independent directors and what is their remuneration?
The maximum tenure of an independent director can be five years. However, they can be re-appointed for another term of up to five years through a special resolution by the company.
In a 2015 note, the Institutional Investor Advisory Services (IiAS), a proxy advisory firm, had pointed out that a large number of companies have had the same independent directors for over 10 years, “which impedes their ability to be neutral and unbiased”.
Independent directors are entitled to a sitting fee of not more than Rs 1 lakh per board or committee meeting. They also get profit-related commission if approved by the company’s shareholders. Independent directors are not entitled to any employee stock options.
What is the role of independent directors?
Their main role is to protect the interest of minority shareholders and improve corporate governance at the firm. They are also required to analyse the performance of the management and mediate in situations of a conflict between the management and the shareholders’ interest.
Typically, independent directors must meet once a year, without the management of the firm, to evaluate the performance of the chairperson of the company and its non-independent directors.
According to the IiAS note, an adequate representation from independent directors can help strengthen the internal control mechanism of a firm by reigning in the powers of dominant shareholders and ensuring that critical decisions are reviewed from an unbiased and objective perspective.
“Regulations have pushed some companies to restructure their boards. But most companies seem happy to follow a ‘tick-box’ approach to compliance, rather than abiding by the intended spirit of the regulations. This needs to change. Instead of appointing agreeable directors or family members, boards must strive to foster a culture of dissent and healthy debate, which will promote greater transparency,” said the IiAS note.
Have any controversies in the past fuelled concerns about the role of independent directors?
In January 2009, when B Ramalinga Raju, chairman of Satyam Computers, publicly admitted to cooking the company’s books over several years to the extent of Rs 7,136 crore, what irked the investors most was that none of the independent directors of the firm could spot the discrepancies in the books of the firm till Raju confessed to the fraud.
In 2014, when United Bank of India was stressed by the increase in non-performing assets, none of its independent directors — a politician, a media manager and a businessman — had any qualifications to help the ailing bank.
J N Gupta, managing director of another proxy advisory firm Stakeholders Empowerment Services (SES), says independent directors in India typically take up such roles for monetary compensation and are rarely independent. “Independence is a character that the law cannot infuse. Law can only infuse fear,” he says.
More recently, the boardroom battle between Ratan Tata, Chairman Emeritus of Tata Sons, and Cyrus Mistry, former chairman of Tata Sons, exposed the vulnerability of independent directors who stand up to or take on a dominant shareholder. Nusli Wadia, one of the most vocal independent directors of the Tata Group, was removed from Tata firms after he publicly backed Mistry, who complained of mismanagement and corporate governance failures within the group’s companies.