Day 75 – Q 1. Independence of Directors is an important aspect of corporate governance. Comment. What factors create a hindrance in true independence of directors?
1. Independence of Directors is an important aspect of corporate governance. Comment. What factors create a hindrance in true independence of directors?
Corporate governance is the system of rules, practices and processes by which a firm is directed and controlled. It essentially involves balancing the interests of a company’s many stakeholders such as shareholders, management, customers, suppliers, financiers, government and the community.
As per clause 49 of the listing agreement that companies sign with the exchanges, an independent director is a non-executive director who does not have any pecuniary relationship with the company, its promoters, senior management or affiliate companies, is not related to promoters or the senior management, and/or has not been an executive with the company in the three preceding financial years.
Independence of directors as an important aspect of corporate governance:
- Independent directors are necessary to protect the interests of shareholders, especially minority shareholders.
- To act as watch dog for mismanagement and help the company in improving corporate credibility and governance standards.
- An independent director is not as closely tied to the company as executive and investor board members; this can allow the independent director to be more impartial and objective in decision making.
- An independent board member can bring focus and depth of perspective about company.
- Independents are the key to conflict resolution, they are in a unique position to cut through to the core issues and find agreement much faster.
- Independents can mentor and share their network, an independent can be specifically recruited for skills or perspective needed by executive team.
Factors creating hindrance in the independence of directors:
- Nepotism, favoritism in board appointments.
- Lack of effectiveness and transparency in performance appraisal of directors.
- Relative ease by which independent directors can be removed if they don’t side with the promoters.
- Entire boards are not often present at general meetings for stakeholders to ask questions from them.
- No Capping on the maximum number of directorships for a person.
The UdayKotak Committee on Corporate Governance had given various recommendations on Independent Directors to ensure their independence such as:
- Number of independent directors(IDs) on listed company boards be raised from one-third to half.
- Listed companies to appoint one woman independent director.
- Organize more frequent exclusive meetings among IDs to discuss company affairs.
- Strengthens their accountability by making it compulsory for IDs to give detailed reasons if they resign before the end of their term.
- Provides minimum compensation for Independent Directors.
- Capping the Maximum Number of Directorships for a person to 8.
Independent directors can play a significant role in transforming the corporate governance structure of the Indian corporate sector which is currently facing problem of excess debt and board room disputes. Thus removal of hindrances in independence of directors will be a significant achievement for the corporate sector.
Best answer: Bard of Avon