Dissertation

By Kashyap P Kapadia
IOD Master Class
Batch No. 97.
Oct . 18th – 20th 2013
Date of Submission : 11th November 2013.

My sincere thanks to the IOD and the Faculty which gave us a deep insight on the Corporate Directorship. The
above dissertation is prepared by me with my own experiences, interaction and with a flow, to gauge major
challenges, which the emerging economies face ,such as frauds, scams, and many other deficiencies which come
out due to lack of expertise in operating the companies by the promoter directors. i myself have been ceo for 10 and
now director for almost 10 years but never have deeply delved into the vast subject of a actor called Independent
Director. It was really inspiring and a self-orientation process in preparing the above Dissertation.
 Emerging Role of Independent Directors
In The Board Room.
“Impartial. Unable to perceive any promise of personal advantage from espousing either side of a
controversy.”
- Ambrose G. Bierce, 19th century American writer…..

In today’s ever fast changing Business Practices and the Dynamic Market situations, it has become
far more challenging proposition to run businesses. If we travel from East India Company of 1602,
and then the very legislative act of ours well known as “The Companies act of 1956”” which is the
bible of the entire businesses run by the huge corporations in India.

Consequently, governance reform in recent years has increasingly pinned hope as well as
responsibility on independent directors to enable higher standards of governance. Although the
institution of independent directors has been the subject-matter of debate lately, the concept itself
is hardly of recent vintage. Independent directors were introduced voluntarily as a measure of good
governance in the United States (U.S.) in the 1950s before they were mandated by law.2 Thereafter,
owing to sustained efforts by the Delaware courts and stock exchanges in deferring to decisions of
independent boards, independent directors took on greater prominence.

Right from the Stock Scams to the latest 2G scams , there has been continuous changes and sound
changes have been sought to strengthen the investments of the stakeholders to pin the
accountability of the Promoters and the Ceo. Since 1991, and as of date India is going to have the
first revised and refurbished act which may be now known as the New Companies Act- 2013. The
Act has given the very impetus needed by defining the roles of a Independent Directors on the Board
of the Public limited Cos or the Private run corporations. The act clearly defines the Duties , Roles,
Responsibilities & Accountability of the Directors which till date had no exposure. The very
Independent Director who was mere rubber stamp is now armed with proper statute guidelines to
keep the Board and the Ceo in Check.

An independent board of directors in public listed companies is seen as an integral element of a

country’s corporate governance norms. Board independence has taken on a pivotal status in
corporate governance that it has become almost indispensable.Given this scenario we may now see
the Future Emerging Independent Directors who had ideas but could not implement them, such as
Operations, Finance, Marketing, Legal, and CSR activities. The Independent Directors will now
impress the Board with their capabilities at their best. Over the past two decades, the relationship
between corporate governance and firm performance has received considerable attention from
inside and outside academia. Most cross-country studies on corporate governance focus on the
relationships between economic performance and countries’ different legal systems, particularly the
level of investor protections.

On a different track, researchers have investigated how different firm structures determine
corporate governance and the effect of those firm-level governance choices on firm performance.
These studies, largely based on data from developed countries with dispersed ownership, assess
several governance indicators that could be associated with higher valuation and better
performance. More than 26 countries have demonstrated that they would like to follow the
western style of functioning and as such they have published guidelines for effective functioning of
the Organisation in total capacity defining the role of The Independent Directors. However, country-
specific research on emerging markets has delivered mixed results, suggesting that empirical
evidence on the relationship between corporate governance indicators and firm performance in
emerging markets is inconclusive. Governance arrangements that are optimal for investor protection
in one country could be suboptimal for companies in another. For example, the level of ownership
concentration at which owners are more likely to expropriate minority shareholders changes from
country to country, depending on the regulations and the level of enforcement. Further, in some
circumstances, “friendly” outside directors may also be more trusted and more knowledgeable than
“independent” directors.

Origin of Independent Directors in the U.S. & U.K.

The origins of the concept of the independent director which, as discussed earlier, can be related to
the U.S. and the U.K. . The seeds of the independent director concept were sown in the theory of the
monitoring board. Apart from that, whenever independent directors have been looked upon as a
monitoring mechanism in companies, whether by the legislature, judiciary or even self-regulatory
organizations in these countries, it has always been with a view to addressing the manager-
shareholder agency problem. In the year 1992 The Cadbury Committee report made a huge impact
in the corporate world operatives across the globe.

In the year 2000 SEBI made it mandatory, that all large public listed companies in India are to have a
minimum number of Independent Directors. The purpose was to ensure and identify the rationale by
inducting Independent Directors on Board, their functions, responsibilities and pin the
accountability. The Transplantation of the concept in the Indian Context was to ensure that how
effective was this change. However the change has empowered the Independent directors to play a
more meaningful role in helping the board run the organisation .

India Particularly follows the insider model of Running the organisation. Like we can say Tatas,
Birlas, Ambanis, Goenkas, Bajaj, Reddys, and many others. The insiders have a particular interest in
the company and thus excercise a dominant role in the running the company affairs.

Lest now see how effective it is when a Diligent Independent Director is incorporated in the Board
and what will he/she assure that the due processes are followed and what are the reasons for them
to bring them on the board.

Resistance to the Change: Do we really need Independent Directors?

The introduction of the new guidelines faced stiff resistance. The foremost argument against its
implementation was that there was a paucity of qualified personnel. Most of the listed companies,
out of 9000, were required to comply with Cl. 49 of the Listing Agreement by December 31, 2005,
which mandates that independent directors should constitute 50 % of their Boards; otherwise the
defaulting companies will have to face severe penalties. An estimate puts the requirement of
independent directors at over 30,000.

Moreover, it was argued that such directors who would attend very few board meetings (a minimum
of four a year) and may tend to be obtrusive to the functioning of the board by professing their
expertise without fully appreciating the conduct of the affairs. Besides, in the context of family-
dominated Indian companies, where the promoters’ interests often over-shadow those of the share-
holders, the independent directors may not be in a position to exert sufficient influence. The first
argument may be outright dismissed. It is unimaginable to think that in a country as populous as
ours, finding qualified personnel could prove to be too onerous. Even if so, there is no reason to
suggest that there is sufficient talent to appoint directors but not independent directors or that
those with materially significant dealing with the company are likely to be any more qualified than
those independent of such dealings. With the appropriate training, this paucity could very easily be
overcome and pave the way for a more promising corporate governance regime. It has been pointed
out that this, in fact, is a legitimate concern and it would perhaps take some time before the
demand-supply gap could be effectively bridged, it is nonetheless a necessary move.

The Companies Act and Independent Directors The Companies Act looks at all kinds of directors in
the same light. While it provides for a few extra compliances for whole time directors and requires
the disclosure by interested directors, it does not exempt independent directors from any of the
duties, liabilities or responsibilities of the board. Therefore, independent directors are woven into
the corporate governance team (after all that is the very purpose of their appointment) as any other
director and are bestowed with the same power as the other directors to all directors. §309(4)
allows for separate limits and restriction to be made applicable on the remuneration of independent
directors. Apart from the liabilities that the director may invite as a corporate director, there may be
other liabilities under other laws as well. Any communications addressed to the directors of the
company are understood to address the independent directors as well. For instance, in the
Worldcom and Enron settlements, the liabilities extended to the independent directors to the tune
of $18 million by 10 independent directors in Worldcom and $13 million by 10 independent directors
in Enron. However, in the Indian context it may be argued that liability arises only on account of
conduct or act or omission on part of the director to fulfil certain obligation, and not be the mere
fact of holding an office.

Board Independence , In emerging markets where external governance mechanisms are weaker,
boards’ ability to effectively monitor managers on behalf of shareholders has been crucially
important for corporate governance. However, this board function may be undermined if
shareholders and managers (ownership and control) are not fully separated. This is a particular
concern for minority shareholders in emerging market companies. Therefore, corporate governance
codes commonly recommend a high level of board independence—especially independence from
management. A study of outside directors in Korea, for example, shows that their impact depends
on the board’s overall composition and the market in which the firm operates. Independent
directors perform their role more effectively in diverse boards, such as when boards include foreign
directors. In countries where independent members are not mandated by law, the labour market for
independent directors does not develop, which, in turn, affects the quality of independent board
members.

Financial Market Development, is often hampered by weak legal foundations and enforcement. As a
result, the controlling shareholders invest their free cash in new businesses that they control. Such
diversified investments under common control lead to the formation of business groups. In some
emerging markets, such as India, business group structures that function as internal financial
markets are correlated with better performance. In others, such as Colombia, group affiliation is
negatively associated with performance. Based on our analysis, this variation likely depends on the
primary motivation for the emergence of business groups in the first place, which varies from tax
optimization to lowering transaction costs to diversifying risks. There is also a question of how—and
whether—group structures are regulated. In Taiwan, for example, connected enterprises are
mandated to disclose crossholdings and pyramidal links. In India, under the new Company Law, a
company can hold as many subsidiaries as it likes, but a subsidiary cannot act as the holding
company of another company. These provisions aim to prevent private control over public
companies through pyramidal structures.
However when Kumarmangalam Birla of the Aditya group formed a committee of corporate
governance in 1999 , the share price of the Group rose by 4%, thus delivering the goods in the need
of hour and a welcome step. The market value of the firms out of 4000 samples of survey have
established that due to the clause 49 reforms have found more acceptance in the general public and
small investors who are investing with confidence

Small Investors Protection, Despite limited evidence of the impact of director independence in
emerging markets, our review of investment policies of major institutional investors shows that
many of them still expect boards to have a meaningful composition of independent directors to
protect their minority interests, especially in companies controlled by families, other firms, or
governments. Listed below are the risks of a non-independent board, potential red flags, and
possible remedies or best practices regarding board independence.

The role of the independent directors of Satyam came into question when the investors and
regulators questioned a bid by the Satyam founder B. Ramalinga Raju to acquire a firm promoted by
his kin. In the immediate aftermath of the Satyam fiasco, nearly 350 in-dependent directors resigned
from their positions across India. The resignation of the independent directors signals to the
investors that all is not well within the board.

This is perhaps attributed to the fact that a considerable proportion of independent directors do not
feel confident of facing the consequences of the conduct of their companies. This may be because
they either have knowledge of illegal conduct and have failed to influence the board to counter-act
effectively or because they are not in control of the happenings of the company – neither of the two
reflect positively for the present state of corporate affairs in India.

It also brings to the fore another paradox – can independent directors be said to be independent if
their jobs are in the hands of the promoters? If anything, this would make a case for a stronger voice
(through numbers) for independent directors on the boards. With the Satyam debacle behind us,
there is optimism that cor-porate India shall heed to the reality that independent directors are so
placed as guardians of the shareholders and that their accountability is of paramount concern to the
investors and the company management alike.

Risk Mitigation: Weak or ineffective boards—crowded by family members—that do not provide a

constructive challenge to controlling shareholders. This, in turn, can lead to poor strategic decisions
or to controlling shareholders pursuing an agenda that benefits neither the company nor minority
shareholders. Entrenchment of weak executive management. This is a particular risk factor in family
companies, where attracting and retaining high-caliber professional staff can prove difficult if top
jobs are reserved for family members. A Independent Director is therefore required to be on the
Board , whose prime concern is the robust health of the company.

Hooters or shall we say Whistle blowers : Lack of board independence—lack of independent

members of significant number and relevant expertise, or lack of information concerning board
members’ qualifications and skills. No evidence of effective succession planning. Lack of disclosure
on board practices, poor shareholder access to board members, or disclosure that suggests poor
attendance or a lack of rigor in board deliberations. Poor disclosure on executive remuneration, or
remuneration policies that focus on short-term performance. Thus a Independent Director who
comes in with a expertise can save lot of losses to the company, share-holders, bankers and overall
be a guardian to the promoters investment, raising concerns which are detrimental to the company.
Business Group Affiliation : Many of the risks to shareholder value ultimately relate to concentrated
ownership, which is the predominant form of ownership in most emerging market companies. In
many cases, controlling shareholders can be a positive influence by providing strong oversight over
executive management and by fostering a corporate culture focusing on long-term value creation.
Too often, however, controlling shareholders have the opportunity to engage in abusive behavior, a
circumstance that can be exacerbated in jurisdictions where transparency is poor and where a weak
rule of law fails to give minority investors proper judicial recourse.

For example, the case of Satyam Computer Services in India in 2009 demonstrates how a controlling
owner can perpetrate fraud and serve the owner’s interests at the expense of minority shareholders.
Similar examples exist in other markets. In 2008, Sibir Energy in Russia agreed to engage in property
transactions to accommodate one of the company’s largest shareholders. In Gome Electrical
Appliances in China, the company’s chairman and controlling shareholder was convicted in 2010 of
manipulating the company’s stock—and has attempted to control the company from prison.

Business group structures that bring together diversified businesses under the common control of a
controlling shareholder add further complexity to concentrated ownership. In many countries, most
firms are affiliated with a business group that is controlled by an owner through a complex web of
ownership structures.Thus a very need of a Independent Director, who can prevent such collateral
damages and also guide the Promoters in the entire group holdings.

Opaque Ownerships, are there when there are lot of companies floated by a the same promoter
directors. A independent Director thus steps in and weeds out the possibility of economic losses by
differentiating between voting rights and economic stake, avoids weak regulatory enviornment and
protects the stakeholders .

Related-party transactions, - A Independent director thus insists for the safety of the investors and
insists that related-party transactions of a material nature be scrutinized and be then only approved
by board members, who should, in turn, ensure that they are conducted on the basis of
independently vetted arms-length valuations. The fundamental purpose behind the appointment of
Independent Directors is, and the emerging role is to so to speak, impartiality. Companies have 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.

Idependent Directors to Prevent Frauds and detection of Frauds …The regulatory environment in
India around corporate world is changing rapidly and those entrusted with governance i.e. the Board
of Directors and the Audit Committee are being made responsible for the prevention and detection
of fraud. The current legislation framework does not differentiate between IDs and executive
directors (EDs) as it fails to distinguish between their liabilities. The real question is, since
independent directors only play a supervisory role, should they be penalized only in the event of a
discrepancy that directly relates to their responsibilities?

The concept of the institution of IDs is simple. 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 and question the conduct of organizations on relevant issues. After the break out of some
of the largest corporate scams in the country in recent times and the subsequent increase in the
number of resignations by IDs, there is a heightened focus on their role and responsibilities as
custodians of stakeholders’ interests. The proposed Companies Bill, 2011 /2012/2013 finally, which
is issued by Ministry of Corporate Affairs have further stepped up their interest in this subject. The
corporate governance structure hinges on the IDs, who are supposed to bring objectivity to the
oversight function of the board and improve its effectiveness. However, the problem is that an ID
cannot play an effective role in isolation despite their commitment to ethical practices. They cannot
stop a decision that is detrimental to the members individually, but if they act collectively, then they
can act prudently before arriving at any such decision. IDs may not be in a position to stop fraud at
the highest level, but with a high level of commitment and due-diligence, they may be well placed to
identify signals that indicate that everything is not as it should be. Globally, with the evolving
regulatory landscape, which makes them responsible for the prevention and detection of fraud,
directors have begun exercising adequate oversight on the management of the risk of fraud. Non-
compliance with these regulations or guidelines can have serious repercussions for directors,
including their reputational loss and personal liabilities. The role of IDs in fraud prevention and
detection has come under the direct scanner of regulators, members and other stakeholders due to
the recent exposure of high-profile instances of fraud in India. In the last few months, we can clearly
see IDs taking direct interest in reviewing the fraud risk management framework put in place by
their organizations to mitigate the risk of fraud. The IDs can play the crucial role of bringing
objectivity to the decisions made by the board of directors by playing a supervisory role. While they
need not take part in the company’s day-to-day affairs or decision making, they should ask the right
questions at the right time regarding the board’s decisions. Raising the appropriate issues at the
right time would help them in avoiding the occurrence of unwanted situations and their
consequences to a great extent. The need of the hour is for the legislature to draw a line between
IDs and EDs by defining their roles and responsibilities, and demarcating their liabilities. Discretion
lies with the enforcement authority to determine the extent of the liability that the IDs may incur.
The report lists a series of questions every director should ask to ensure compliance with
governance:

 Do we set and communicate the right "tone at the top"?

 Do we effectively assess our corruption risk?

 Do we have effective standards, policies and processes to address these risks?

 Do we adequately communicate and train directors on our anti-bribery and corruption

policies and processes?

 How do we know that our training is effective?

 What incentives do we provide for compliance and penalties for non-compliance?

 How do we monitor and audit to detect improper conduct?

 Do our compliance officers have adequate clout, resources and independence?

 How do we review the effectiveness of our compliance program?

 When we find a problem, do we ensure that an independent and thorough investigation is

carried out?
Corporate Governance - Independent directors broadly fit into the overall structure of corporate
governance. Their appointment ensures an effective and balanced composition of the boards. It is
widely recognized that the board of directors is the most significant instrument of compliance with
corporate governance. Ergo, the constitution of this board and its supervision is of utmost
importance. The independent directors contribute to the board by constructively challenging the
development of policy decisions and company strategies. They also scrutinize the performance of
the management and hold them accountable for their actions. Their independence, on account of
lack of affiliation which is likely to prejudice their decisions, allows them to fulfil these tasks more
efficiently. While they are answerable for the company’s actions, they are less likely to be affected
by self-interest in these actions.

Their independence, on account of lack of affiliation which is likely to prejudice their decisions,
allows them to fulfil these tasks more efficiently. While they are answerable for the company’s
actions, they are less likely to be affected by self-interest in these actions. This puts them in a unique
and advantageous position to question the company’s practices. It is because of this fact that, in
practice, independent directors have conventionally been viewed as “adversaries” within the board.
Their position has, however, gradually become more acceptable with the realization that
independent directors bring something more to the table. Even when they stand in opposition to the
other directors, the tension created within the board is nothing but positive tension. In the long run,
independent directors bring with themselves a more balanced perspective. The independent
directors must meet at least once a year without the chairman or the executive directors and a
statement in the annual report declares whether such a meeting was conducted or not. This is,
again, to encourage the independent and uninfluenced judgment of the independent directors while
keeping in mind the accountability owed to the shareholders of the company and to dissuade any
self-interest to creep into the management of the affairs. Apart from attending the annual general
meetings and discussing the issues relating to their non-executive roles (which may vary depending
on the company), they periodically review legal compliance reports prepared by the company and
review the steps taken by the company to rectify any shortcomings.

In the past, the Indian corporate sector has faced major criticism for its poor corporate governance
compliance record, as the presence of large family-dominated businesses has posed serious threats
to transparency and accountability. Traditionally, the major stakeholders in most of these
enterprises have been family members who did not find it compelling to reveal sufficient
information to the independent directors. Keeping a check on accountability and transparency
became an arduous task for the independent directors espe-cially because they attended very few
meetings per year which were to a large extent ceremonial in nature. This did not make it possible
for independent directors to fully comprehend the issues before the board and to be accountable in
large business structures which were often conglomerates having diverse interests and investments.
This may be contrasted with the more efficient western enterprises where independent directors
are viewed as partners of management and as “outside guardians”, whose job is to make sure that
the management stays focused on delivering shareholder value.

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 Cl. 49 of the Listing Agreement which was to apply to companies
in a phased manner. It applied first to all Group-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 Cl. 49 with several changes.
The new Cl. 49 lays down a more stringent qualification for in dependent 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. As already said that Cl. 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

As we have seen earlier, boards are required to have at least one third of their size comprised of
independent directors, and if the chairman is an executive director or related to the promoters, then
at least one half. This requirement has been mandatory for all large companies since 1 January 2006.
However, it is found that 7% of the firms surveyed do not have the minimum one-third independent
directors and further a number of other companies that have a common chairman and CEO do not
have the minimum one-half independent directors. They find that only 87% comply with board
independence rules.The fact that 13% companies are yet to even comply with the minimum formal
requirement of independent directors is startling.

First, the definition of independence does not require any positive factors but only the absence of
relationships with the company or its controlling shareholders. Hence, the pool of candidates for
companies to choose from is fairly large, especially in a country whose total population exceeds one
billion. Further, it has generally not been difficult for companies to find independent directors. In
this background, non-compliance of even the formal requirements by a large number of companies
indicates the lack of all-round corporate will to follow more stringent governance norms in India.
Even where companies do meet the minimum number of independent directors, a large number of
them are appointed principally to satisfy compliance requirements.Balasubramanian, Black and
Khanna also find that in 59% of the surveyed companies, there was a separate CEO and Chairman. At
first blush, these statistics appear to be impressive. However, interview evidence suggests that
several companies maintained separate CEO and chair positions so as to be able to comply with
Clause 49 by appointing one-third of their board as independent directors rather than one-half,
because if the positions of CEO and chairman were held by the same person the more onerous
requirement of appointing one half of the board as independent directors would apply instead of the
one-third requirement. This way, management and controlling shareholders can keep the influence
of independent directors on boards at a minimum.

The survey shows that majority of the respondents (56%) do not have a nomination committee to
lead the process of identifying and appointing directors. Possibly, the general practice has been for
the promoters toidentify people known to them or with whom they have comfort levels or
otherwise people who are known personalities and can thus enhance thevisible creditability of the
board. This naturally restricts the choice to arelatively small segment and explains why the second
most populated country in the world has been voicing a problem with numbers when it comes to
finding independent directors.

Likewise though Independent directors were on the Board of Satyam, mishap happened. Satyam
Collapsed badly and there was loss of jobs as well as the major shareholders lost their earnings. The
board consisted of 5 independent directors . The independent directors raised the objections and
the timing of the proposal by Satyam to acquire Maytas, as their core businesses were nowhere
same and the cost was 7,900 cr a whopping usd 1,615. !! If the acquisition was being done by the
board then how will be the shareholders be convinced, was also a question. Therefore the very
pitfalls for which clause 49 has been enforced /reformed - was blatantly violated – on two three
grounds – (1)Related party were involved ( 2) The independent directors did not blow the whistle
(3) The minority shareholders earnings were tossed out. The 4th and the final why were the Balance
sheets / financial statements not scrutinized by the Independent Directors as this expertise is a
must. As there were fictitious assets shown but were they really there? – it doesn’t end here even
the latest Jignesh shah led MCX has collapsed just because of the negligent governance. i personally
had spoken to Jignesh shah in 2005 when they were planning to float mcx when we met in a
conference in Delhi, i specifically pointed out that what is the guarantee of physical stock and the
timing was very perfect. The banks started paying advances on the warehouse receipts.. who
checked the borrowers? No one .. ( my own quote ).

Finally it is in the best interest of the emerging economies like ours to strictly follow the guidelines
and ensure fair governance and participation by the Independent directors. Hence we shall see the
salient features of the Independent directors , duties , responsibilities, ethical conduct, and what is
the need for the boards good governance…...

If Board are to truly play a leadership role in future, they require to:

a) Ensure independence for management. Chairman of the Board should preferably be an

Independent Director.

b) Must hold themselves accountable for the performance of their boardrooms through
rigorous annual evaluation.

c) Build knowledge capabilities in areas of strategy, implementation and globalization.

d) Must harness power of information technology more successfully to ensure ready access to
critical information.

e) Must look after interest of not only shareholders but all stakeholders.

The Duties of Independent directors is to

1. Undertake appropriate induction and regularly update and refresh their skills, knowledge
and familiarity with the company;
2. Seek appropriate clarification or amplification of information and, where necessary, take and
follow appropriate professional advice and opinion of outside experts at the expense of the
company;
3. Strive to attend all meetings of the Board of Directors and of the Board committees of which
he is a member;
4. Participate constructively and actively in the committees of the Board in which they are
chairpersons or members;
5. strive to attend the general meetings of the company;
6. Where they have concerns about the running of the company or a proposed action, ensure
that these are addressed by the Board and, to the extent that they are not resolved, insist
that their concerns are recorded in the minutes of the Board meeting;
Responsibilities of Independent Directors

a) The fiduciary duties of care, diligence and acting in good faith and totally impartial.
b) Prepare thoroughly for the Board Meeting.
c) Be objective in forming sound decisions relating to the Company and its business.
d) Be open minded, free and frank in expressing your opinions and be willing to engage in
meaningful debates.
e) Be committed to decisions made as a Board.
f) Continuously seek information both from within and if required outside professional
knowledge to keep abreast with the latest developments in the areas of Company’s
operations.
g) Be informed on laws and regulations influencing your functioning as Directors.
h) Utilize your expertise for the best advantage of the Company.
i) To act in the larger genuine interest of the growth and sustainable development of the
Company.
j) Strictly follow the Company’s code of conduct for Director’s.

Role & Functions of Independent Directors

a) Sound advice and counsel, both of which will make the company stronger and more
successful.
b) Support for those investments and decisions that serve the best interests of the Company,
its employees, the shareholders, the community and for the protection of environment.
c) Warnings and caution in those cases in which investments and decisions are not beneficial to
the Company and its stakeholders, ensure that Company has a well defined risk
management policy.
d) Give rich inputs which help in taking decisions, be forthright and frank in giving views, even
disagree with MD or CEO sometimes if required.
e) Must realize their fiduciary obligations to the shareholders and moral obligations to operate
the Company in a legal and ethically responsible manner. Safe guard the interests of all
stakeholders, particularly minority shareholders
Professional Conduct of An independent director shall be :-
1. uphold ethical standards of integrity and probity;
2. act objectively and constructively while exercising his duties;
3. exercise his responsibilities in a bona fide manner in the interest of the company;
4. devote sufficient time and attention to his professional obligations for informed and
balanced decision making;
5. not allow any extraneous considerations that will vitiate his exercise of objective
independent judgment in the paramount interest of the company as a whole, while
concurring in or dissenting from the collective judgment of the Board in its decision making;
6. not abuse his position to the detriment of the company or its shareholders or for the
purpose of gaining direct or indirect personal advantage or advantage for any associated
person;
7. refrain from any action that would lead to loss of his independence;
8. assist in implementing the best corporate governance practices.
9. If independence compromised inform the Board.
Why do we need Independent Directors :- Several distinct benefits:

i. Counter-balance management weaknesses.

ii. Challenge decisions made by the management .
iii. Ensure legal and ethical behaviour at the company while strengthening accounting controls.
iv. Extend “reach” of the company through contacts, expertise and access to debt and equity
capital.
v. Be a source of well-conceived, binding, long term decisions for a Company.
vi. Help the Company to survive, grow and prosper overtime through improved succession
planning.
vii. Protect shareholders value and take care of interest of all stakeholders.

1.Every company shall have a board of directors as under:-

a) Public Company-minimum 3 directors

b) Private Company-minimum2 directors
c) One person company-minimum1 director
d) Maximum number of directors-15
e) Company may have more than 15 directors after passing a board resolution.
2. Woman Directors – At least one woman director in :-

a) Every listed Company- within one year from the commencement of section 149 of the Act.

b) Every other Company having a paid up share capital of 100 crore or more-within 3 years
from the commencement of section 149 of the Act.

3. Every company to have at least one director who has stayed in India for a total period of not less
than 182 days in the previous calendar year.

4. IDs- An ID means a director other than MD or whole time director or a nominee director.
The expression ‘Independent Director’ shall mean a non-executive director of the company who:-

Have no material, pecuniary relationships or transactions with the Company, its promoters, its
directors, its senior management or its holding company, its subsidiaries and associates which
may affect independence of the director;

Is not related to promoters or persons occupying management positions at the Board or one
level below the Board;

Has not been an executive of the Company in the immediately preceding three financial years.

Is not a partner or an executive or was not partner or an executive during the preceding three
years, of any of the following:- The statutory audit firm or the internal audit firm that is
associated with the company, and
The legal firm(s) and consulting firm(s).

Is not a material supplier, service provider or customer or a lessor or lessee of the company, and

Is not a substantial shareholder of the company i.e. owning 2% or more of voting shares.

Is not less than 21 years of age for public limited companies?

Total directorship for a person is a maximum of 15. ( but with the new act it is proposed to be
made 20 including private cos.)..

The Criteria as per the Companies Act. 2013.

1. A person of integrity & possesses relevant expertise and experience.

2. Who is or was not a promoter of the company or its holding, subsidiary or associate
company.
3. Has or had no pecuniary relationship with the company, its holding, subsidiary or associate
company or their promoters or directors during the current or preceding two financial years.
4. None of whose relatives has or had pecuniary relationship or transaction with the company,
its holding, subsidiary or associate company or their promoters or directors amounting to 2%
or more of its gross turnover or total income or Rs 50 lakh or such higher amount as may be
prescribed whichever is lower, during the current or two preceding financial years.
 5. Who neither himself nor any of his relatives
i. Holds or has held a key managerial position or is or has been employee of the company or its
holding, subsidiary or associate company in any of the previous three financial years or
ii. In the three preceding financial years he has been
 A firm of auditors or company secretaries in practice or cost auditors of the company or its
holding subsidiary or associate company or such firm
 Any legal or a consulting firm that has or had any transaction with the company its holding,

subsidiary or associate company amounting to 10% or more of the gross turnover of such

firm.

iii. Holds together with his relatives 2% or more of the total voting power of the company or

iv)Is a CEO or director of any nonprofit organization that receives 25% or more of its receipts from
the company, any of its promoters, directors or its holding, subsidiary or associate company or that
holds 2% or more of the total voting power of the company or
(v) Who possesses such other qualifications as my be prescribed

6) Every ID at its first meeting and thereafter at the first board meeting every financial year will give
a declaration that he meets the above criteria.

No. of Directors1. Every company shall have a board of directors as under:-

a) Public Company-minimum 3 directors

b) Private Company-minimum2 directors

c) One person company-minimum1 director

d) Maximum number of directors-15

e) Company may have more than 15 directors after passing a board resolution.

2. Woman Directors – At least one woman director in :-

a) Every listed Company- within one year from the commencement of section 149 of the Act.

b) Every other Company having a paid up share capital of 100 crore or more-within 3 years from the
commencement of section 149 of the Act.

3. Every company to have at least one director who has stayed in India for a total period of not less
than 182 days in the previous calendar year.
4. IDs- An ID means a director other than MD or whole time director or a nominee director.

5.NO. of IDs:- The following types of companies will have atleast one third of the total number of its
directors as IDs:

a) Every listed public company

b) Public companies having paid up share capital of Rs 100 Cr or more

c) Public Companies which have in aggregate, outstanding loans or borrowings or debentures

or deposits exceeding Rs 200 crores.

d) Any fraction in such one-third number to be rounded off as one.

To be complied within one year w.e.f commencement of Act.

6. Nominee director means a director nominated by any financial institution or appointed by any
govt or any other person to take care of its interests.

a) Maximum directorship- 20 companies out of which public companies not more than10.

b) Maximum board committee membership-10 public companies

c) Maximum Chairman of committees-5 public companies.

7.Small share holders Director:-

A listed company may suo moto or upon notice of not less than 500 or 1/10th of the total number of
small shareholders whichever is lower, elect a small shareholders director from amongst the small
shareholders
Small shareholders means holding shares of not more than Rs 20,000=value or such as may be
prescribed by the central govt

b) Such small shareholders will give a 14 days notice of their intention for suggesting a candidate
with information as under:

i) Name, address, shares held and folio no of the proposed person and small shareholders
proposing such name.

ii) Such notice to be accompanied by a statement to be signed by the proposed person stating:

aa) DIN
ab) He is not disqualified to become a director as per the criteria laid down in the Act. Such director
shall be considered as ID

ac) His consent to act as a director

iii) His appointment conditions will be same as for other IDs except:

aa) Shall not retire by rotation

ab) Tenure shall not exceed a period of three consecutive years

ac) On expiry of tenure, shall not be eligible for re-appointment

iv) He shall vacate his office if:

aa) Ceases to be a small shareholder

ab) incurs any of the disqualifications as laid down in sec 164 & 167 of the Act

ac) no longer meets the criteria of Independent Director

ad) Can not be small shareholders director in more than two companies at the same time.

1. Selection Procedure – IDs may be selected from a databank containing names, addresses
and qualifications of persons who are eligible and willing to act as IDs maintained by any
body, institute or association as may be notified by the Central Govt.

2. Selection of Independent Directors

i. Selection normally done by the Nomination Committee headed by an Independent Director

with inputs from MD or CEO.

ii. Identify core competencies; create competency grid outlining competencies of current
directors and the competencies required.

iii. Competencies which are lacking, search for a pool of candidate directors – eminent persons
of proven integrity with requisite professional skills experience and knowledge.

iv. Companies need board members with backgrounds and skills that complement each other
and are related to mission of the companies.

v. Companies need persons of high integrity and ethical standards, sound judgment and who
can be forth-right in giving views, give rich inputs which help in taking decisions, even
 disagree with MD or CEO sometimes if required. The behavior analysis of prospective
candidates must be verified.

vi. Selection process must be independent and objective not unduly influenced or directly
controlled by management or the significant shareholders. A few questions that can be
asked to prospective candidates during an informal dialogue are :-

a) How should an Independent Director be involved in strategic planning?

b) What type of information would you need to discharge your duties effectively and how
would you obtain it?
c) In your previous board membership, which areas did you have the greatest impact and
made significant contribution?

 Was there ever a disagreement between you and majority view of other board members on a
particular issue and what was the outcome?
 Boards should also gauge a candidates inherent interest in the indepth understanding of the
industry, company and the amount of time the candidate can devote to the job.

One of the significant weaknesses in the current structure for independent directors in India relates
to their nomination and appointments process. Since controlling shareholders (who are to be
monitored) have a strong influence on the nomination and election process, the independent
director institution fails to have any bite to begin with. As we have seen, independent directors tend
to toe the line of the controlling shareholders as the latter category of persons nominates, appoints,
remunerations, renews the term and can even remove the independent directors. This process
obstructs the efficacy of independent directors in protecting the interests of minority shareholders.
In terms of the way forward, one of the key areas for reforms relates to the process of nomination
and appointment of independent directors. In this section, I propose to explore several alternate
structures for the appointment of directors (other than straightforward election by shareholders)
that may diminish the influence of controlling shareholders and thereby instil greater independent in
fact in such directors. The details of each structure and a discussion of their advantages and
disadvantages precede the recommendations for an optimal structure.
Emerging Role Of Independent Directors In Corporate Governance

In conclusion, the objectives of corporate governance cannot, per-haps, 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.

Cl. 49 should also come as a reminder to directors that they are fiduciaries of shareholders, and not
of the management and that there are con-tinuous efforts being made to make them more
accountable. To dispense with such fiduciary functions, it is not sufficient to show the mere absence
of bad faith or fraud. Instead, this relationship implies the need for affirmative action.

However, all is not merry. Certain things have not been clarified in the Listing Agreement. For
instance, if it is revealed at a later date that the independent director on the Board in not in fact
independent – what would happen to the decisions of the board? Some experts have pointed out
several deficiencies in the working of independent directors. These include complaints against their
inability to find sufficient time and their lack of knowledge regarding the company affairs to fulfil the
demands of their position. As noted in the paper earlier, there are concerns over the gap in between
the demand and the actual number of qualified personnel. These flaws are hardly unexpected.

In a move which is likely to revolutionize the corporate governance structures in our companies,
progress has to be steady even if slow. We need to contribute fruitfully to this process of transition.
To address this paucity, institutions such as the Bombay Chartered Accountants Society have
launched programs to professionally train individuals as independent directors.In the coming few
years, one would expect to see more active participation from independent directors. In addition to
the aforementioned grey areas, solutions to other problematic areas- like the appointments which
are handled by promoters, a comprehensive and clearer understanding of the responsibilities and
greater empowerment of independent directors.

One possible model which has been suggested by critics of the present system focuses on handing
over of the charge of training, recruiting, appointment and compensation of independent directors
to a centralized authority under the SEBI.Directors find themselves at the vanguard of the corporate
governance revolution. They need to embrace the principles of good practices. At the same time,
investors must also be pro-active in their demands and expectations of the highest level of
governance by exercising their rights. The efforts Jay Lorsch, Professor at Harvard Business School,
points out that the problems commonly faced with independent directors do not lie with people
who serve on boards but instead the structure of the boards themselves.

Thus, the underlying problem is that board members are part-timers who are time pressured and
who often lack specific knowledge. are in the right direction and recent events, particularly those
discussed in the paper, further strengthen our resolve to pursue these objectives with utmost
vigour. P&G is the latest Example wherein they called a retired CEO back for reformation which
could only have happened since there were IDs and experts on Board who saw the downward trend
and hence jettisoned by bringing the old Ceo back for revival of co’s top position.
Compilation of this dissertation was done by referring to the following presentations & articles

Lt. Gen (retd.) Surinder Nath , PVSM, AVSM Former Independent Director, L & T Board, Former
Chairman, Union Public Service Commission Former Vice Chief of the Army Staff. , Havard Business
School. Mujs law review Jitendra Singh, Mike Useem & Harbir Singh, N. Venkiteswaran, Corporate
Governance in India 2005 Naresh Chandra Committee on Corporate Audit and Governance, Artin
Wheatley, Corporate Governance - Time to Take Stock, Balasubramanian, Black and Khanna,
KPMG, E&Y, William L Megginson & Pradeep K Yadav. FICCI-GT. Proctor & Gamble, Infosys, Kings
Committee report 3 – South Africa

Thankyou…………………………………………..

Kashyap P Kapadia
Integral Shipping & Logistics Inc.
Mumbai .
istckk@gmail.com