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INDEPENDENT DIRECTORS

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INDEPENDENT DIRECTORS
Mr. M. GOVINDARAJAN By: Mr. M. GOVINDARAJAN
March 12, 2009
All Articles by: Mr. M. GOVINDARAJAN       View Profile
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                        Corporate governance is the system by which companies are directed and controlled. Boards of Directors are responsible for the governance of their companies. The shareholders' role in governance is to appoint the directors and the auditors and to satisfy themselves than appropriate governance structure is in place. The responsibilities of the board include setting the company's strategic aims, providing the leadership to put them into effect supervising the management of the business and reporting to shareholders on their stewardship.  The board's actions are subject to laws, regulations and the shareholders in general meeting.

                        Every company should be headed by an effective board which can both lead and control the business. The caliber of the non executive members of the board is of special importance in setting and maintaining standards of corporate governance. Non executive directors should bring an independent judgment to bear issues of strategy, performance, resources, including key appointments and standards of conduct.

                        Among the non executive directors are independent directors who have a key role in the entire mosaic of corporate governance.  The Kumar Mangalam Birla committee was of the opinion that it was important that independence be suitably, correctly and pragmatically defined so that the definition itself does not become a constraint in the choice of independent directors on the board of the companies.

                        Kumar Birla Mangalam committee and N.R. Narayanamurthy committee gave various recommendations in regard to corporate governance making some compliance as mandatory and some compliance as non mandatory. Among them the appointment of independent directors are specifically and empathetically recommended.

                        Based on the recommendations of the committees, SEBI issued directions to stock exchanges to amend Clause 49 of the listing agreements to compliance with the principles of corporate governance. The listing agreement places some compliance in the composition of Board.  

                        The Board of directors of the company shall have an optimum combination of executive and non executive directors with not less than 50% of the board of directors comprising of non executive directors.

                        Where the Chairman of the Board is a non executive director, at least one third of the Board should comprise of independent directors and in case he is an executive director, at least half of the Board should comprise of independent directors.

                        Where the non executive Chairman is a promoter of the company or is related to any promoter or person occupying management positions at the Board level or at one level below the Board, at least one half of the Board of the company shall consist of independent directors.

                        The listing agreement defines independent director as a non executive director of the company who-

§         Apart from receiving director's remuneration, does not have any 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 the management positions at the board level or at 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) that have a material association with the company.

§         Is not a material supplier, service provider or customer or a lessor or lessee of the company, which may affect independence of the director;

§         Does not a substantial shareholder of the company i.e., own two per cent or more of the block of voting shares.

All fees/compensation, if any paid to non executive directors, including independent directors, shall be fixed by the Board of Directors and shall require previous approval of shareholders in general meeting.  The shareholders' resolution shall specify the limits for the maximum number of stock options that can be granted to non executive directors, including independent directors, in any financial year and in aggregate. 

                        An independent director who resigns or is removed from the Board of the Company shall be replaced by a new independent director within a period of not more than 180 days from the day of such resignation or removal, as the case may be.  Where the company fulfils the requirement of independent directors in its Board even without filling the vacancy created by such resignation or removal, as the case may be, the requirement of replacement by a new independent director within a period of 180 days shall not apply.

                        The listing agreement provides for the appointment of audit committee. It requires that the Chairman of the Audit Committee shall be an independent director. The Chairman of the Audit Committee shall be present at Annual General Meeting to answer shareholder queries.

                        At least one independent director on the Board of Directors of the holding company shall be a director on the Board of Directors of a material non listed Indian subsidiary company. 

                        Independent directors bring an element of objectivity to Board proceedings in the general interests of the company and thereby to the benefit of minority and small shareholders.  The studies on the working of independent directors suggest that they have been most effective in the development of sound business strategies and performance monitoring. This is the reason that 'independence' has become such a critical issue in determining the composition of any board. The independent directors provide an assurance to all those dealings with the company that the Board decisions will not be based on a narrow vision or short term developments and expectations. They constitute a necessary component of a balanced Board structure where in depth knowledge of executive directors is blended with the wider experience and knowledge of the independent directors. Various codes on corporate governance have underlined the significance of associating independent directors on the Board. 

                        Naresh Chandra Committee has opined that not even the most stringent international tenet of corporate governance and oversight assumes that an independent director who interacts with the management for no more than two days every quarter will be in the know of every technical infringement committed by the management of accompany in its normal course of activity. Indeed, making independent board members criminally liable for such infringements is akin to assuming that they are no different from executive directors and the management of a company. This is certainly not so. In fact, the principle is quite the opposite: Independent directors are not managers; they are fiduciaries who perform wider supervisory functions over management and executive directors.

 

By: Mr. M. GOVINDARAJAN - March 12, 2009

 

Discussions to this article

 

RESPECTED AND LEARNED EXPERTS GOOD MORNING AND THANK YOU ALL FOR GIVING THIS FORUM I have a totally different workable view on this. I very very humbly request you to iniitate a national dialogue on this The law at present , on this , that is , all , regarding the appointment, remuneration, and taking responsibility et all, are not workable at all , whether it is in India or US or elsewhere. If this kind, of law , made , nothing , workable action plan can never ever will sea a light of the day. The law , at present , want, the director , SHOULD NOT receive any chunk of MONEY AS SUCH AS what ever name called, where as they , want, the director to HOLD the CONTROL as well . Further , it want , he should possess adequate knowlodge, of the company law, income tax law, other tation law, accountancy, auditing , reporting and standards set in , secretarial law , and all other connected legal precedure there in as well. Further the law , want, the director, should have adequate knowledge of the BUSINESS and also the transactions effected through the company and its commercial, technical , and legal aspects as well . Further , the law ,also , want , he to be a POLICE MAN for the company,company promoters, and it , expects, he should be a ALL AND ALL for the stake holders as well. For all this, thank less job, he should take and put to use , enoromus time and also need to get trainned and retrained , especially in the high and complicated world of business , so as to meet , its ever increasing demands from the various, stake holders . I HAVE A WORKABLE SOLUTIONS , HOW TO POST THIS , KINDLY MAIL TO ME SINCE IT EXCEEDS THE 200 CHARACTERS S.NARAYANASWAMY. M.COM. AICWA. FCS. (BAL) ETC CHENNAI 28 0 93 806 33 209 PRACTISING ON TOTAL COST MANAGEMENT , CORPORATE LAW, INDSTRIAL LAW AND TAXATION and related action there on
By: S.NARAYANASWAMY
Dated: March 13, 2009

The role of independent directors (ID)is that they should really be independent and should work as caretaker and trustee working on behalf of its shareholders. However, the fact remains that they get paid in terms of sitting fees by the company. The moment,an ID starts voicing his/hers views which are against the executive team, there is a high possibility of him being asked to leave or will be chucked out of the board. There should a minimum time period before which an ID cannot be removed from the board say 5 years, and if an ID changes before 5 years, this fact should be reported to SEBI/ Stock Exchanges/Ministry of Corporate Affairs with due explantiion both from Executive team as well as from the ID being removed. This step would bring guts to ID to speak out and safeguard the interests of share holders. The Balance sheet should also carry a page writeup from each of the ID on the company's style of functioning an their views on the company which the company has to print and circulate to all its shareholders. They could also interact independently with the shareholders in a separate communication with the shareholders from time to time, say once in a year or so. This would increase the transparency as well. Rakesh Samar, BE, MBA, AFP Businessman, Financial Planner and Column Writer 31-Pologround, Udaipur. 94141-65987, 0294-2426968
By: Rakesh Samar
Dated: March 13, 2009

 

 

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