Role of independent director in corporate governance
“Corporate Governance is the system by which companies are directed and controlled.”1
Corporate governance is integral to the existence of a company. It inspires and strengthens investor confidence by ensuring company’s commitment to higher growth and profits. The overall objectives of governance should be to maximize long term value and shareholders’ wealth.
Corporate governance is possible only by refurbishing the governing organ i.e. is board. The Board of Directors are crucial part of corporate structure. They are the guardians of their respective enterprise as also the protectors of the shareholders’ interest. They are the link between suppliers of capital (shareholders) as well as those who manage capital (management) to create value. In law, the board owes a strict fiduciary duty to ensure that the company is run in the long term interest of owners.
Management consultant McKinsey published in 2002 their annual Global Investor Opinion Survey2 suggesting that the companies with high corporate governance standards were worth significantly more to investors than those with loose governance standard- even if the comparison was between companies with identical business and financial profiles. For the purpose of the survey, well- governed companies were defined as those having: a. A significant amount of “independent director” including financial specialist on the board, b. A culture of broad disclosure.
c. Strong right and equal treatment for shareholder.
Thus, to perform effectively, it is important for the board to have a substantial degree of independence from management. Predominantly, independence of board lies at the core of corporate governance.
When the goal of management come in conflict with the interest of the shareholders, the independent segment in the Board of Director must be able to stand up and discharge its fiduciary oversight functions. The inclusion of independence directors enhance objectivity and accountability. It is highly believed that a board comprising of majority of independent director can bring about progress.
The NACD Blue Ribbon Commission on Director Professionalism3 has suggested as follows: a. That the board should define and disclose to shareholders a definition of ‘independent director’ and b. That the board should require the candidates to disclose all existing business relationships between them or their employer and the board’s company.
The role of independent director is drawing attention especially in the context of public companies. This class of DIRECTOR ARE NOT EXECUTIVE DIRECTOR, and who don’t participate in the day to day activity of the company.
Independent director is defined as an entity who don’t have a material pecuniary relationship or transaction with the company, its promoters, its management and its subsidiaries, which in attention of the board may affect the independence of judgment.4
The term ‘independent’ mean one who is not subject to control or influence of another, not dependent or contingent on something else.5
As per Clause 49 of the Listing Agreement has defined ‘independent directors’ to mean directors who apart from receiving director’s remuneration do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries which in judgment of the board affect independence of judgment of the director.
COMPOSITION OF BOARD
As per clause 49-1(A) of Listing Agreement there shall not be less than 50% Independent directors the board.
Where the chairman of the board is a non-executive director, at least one third of the board should comprise of independent director and incase he is an executive director, at least half of the board should comprise of independent director.
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