The Crucial Role of Independent Directors in Corporate Governance

Corporate governance is a critical aspect of modern business operations, ensuring that companies are managed responsibly and ethically. Independent directors play a pivotal role in corporate governance, ensuring transparency, accountability, and ethical decision-making within companies. This article explores the importance of independent directors in corporate governance. It discusses the functions, and responsibilities of independent directors, their role in board decision-making, regulatory frameworks, and the term limit for independent directors. The article also examines the challenges faced by independent directors and highlights the indispensable role that independent directors play in promoting good corporate governance practices, ensuring the long-term success and sustainability of companies, protecting the interests of shareholders, and promoting transparency and accountability.

INTRODUCTION

With the Satyam scam in 2009, the Indian corporate sector was shaken and raised questions about corporate governance, ethics, and accountability. The Satyam fraud case is a significant milestone in corporate history that exposed the loopholes in the regulatory framework and highlighted the need for strict laws and regulations. The government introduced several reforms to improve corporate governance and transparency, such as the Companies Act, 1956 was repealed, and the Companies Act, 2013 went into force which addressed the need for independent directors in companies.^[1] The concept of independent directors has gained significant traction over the years, which mandates their appointment in certain classes of companies. In the dynamic landscape of corporate governance, the role of independent directors stands out as a cornerstone of ensuring transparency, accountability, and ethical conduct within companies.

Chapter XI of Companies Act, 2013 deals with the appointment and qualifications of directors. Provisions about who can be an independent director are explained under section 149(6) of the Companies Act, 2013 which states ^[2]

“𝘈𝘯 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘪𝘯 𝘳𝘦𝘭𝘢𝘵𝘪𝘰𝘯 𝘵𝘰 𝘢 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘮𝘦𝘢𝘯𝘴 𝘢 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘰𝘵𝘩𝘦𝘳 𝘵𝘩𝘢𝘯 𝘢 𝘮𝘢𝘯𝘢𝘨𝘪𝘯𝘨 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳  𝘰𝘳 𝘢 𝘸𝘩𝘰𝘭𝘦-𝘵𝘪𝘮𝘦 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘰𝘳 𝘢 𝘯𝘰𝘮𝘪𝘯𝘦𝘦 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳,— (𝘢) 𝘸𝘩𝘰, 𝘪𝘯 𝘵𝘩𝘦 𝘰𝘱𝘪𝘯𝘪𝘰𝘯 𝘰𝘧 𝘵𝘩𝘦 𝘉𝘰𝘢𝘳𝘥, 𝘪𝘴 𝘢 𝘱𝘦𝘳𝘴𝘰𝘯 𝘰𝘧 𝘪𝘯𝘵𝘦𝘨𝘳𝘪𝘵𝘺 𝘢𝘯𝘥 𝘱𝘰𝘴𝘴𝘦𝘴𝘴𝘦𝘴 𝘳𝘦𝘭𝘦𝘷𝘢𝘯𝘵 𝘦𝘹𝘱𝘦𝘳𝘵𝘪𝘴𝘦 𝘢𝘯𝘥  𝘦𝘹𝘱𝘦𝘳𝘪𝘦𝘯𝘤𝘦;

(𝘣) (𝘪) 𝘸𝘩𝘰 𝘪𝘴 𝘰𝘳 𝘸𝘢𝘴 𝘯𝘰𝘵 𝘢 𝘱𝘳𝘰𝘮𝘰𝘵𝘦𝘳 𝘰𝘧 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘰𝘳 𝘪𝘵𝘴 𝘩𝘰𝘭𝘥𝘪𝘯𝘨, 𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳 𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦  𝘤𝘰𝘮𝘱𝘢𝘯𝘺;

     (𝘪𝘪) 𝘸𝘩𝘰 𝘪𝘴 𝘯𝘰𝘵 𝘳𝘦𝘭𝘢𝘵𝘦𝘥 𝘵𝘰 𝘱𝘳𝘰𝘮𝘰𝘵𝘦𝘳𝘴 𝘰𝘳 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳𝘴 𝘪𝘯 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘪𝘵s 𝘩𝘰𝘭𝘥𝘪𝘯𝘨, 𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳  𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺;

(𝘤) 𝘸𝘩𝘰 𝘩𝘢𝘴 𝘰𝘳 𝘩𝘢𝘥 𝘯𝘰 𝘱𝘦𝘤𝘶𝘯𝘪𝘢𝘳𝘺 𝘳𝘦𝘭𝘢𝘵𝘪𝘰𝘯𝘴𝘩𝘪𝘱 𝘸𝘪𝘵𝘩 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘪𝘵𝘴 𝘩𝘰𝘭𝘥𝘪𝘯𝘨, 𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳  𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘰𝘳 𝘵𝘩𝘦𝘪𝘳 𝘱𝘳𝘰𝘮𝘰𝘵𝘦𝘳𝘴, 𝘰𝘳 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳𝘴, 𝘥𝘶𝘳𝘪𝘯𝘨 𝘵𝘩𝘦 𝘵𝘸𝘰 𝘪𝘮𝘮𝘦𝘥𝘪𝘢𝘵𝘦𝘭𝘺 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭  𝘺𝘦𝘢𝘳𝘴 𝘰𝘳 𝘥𝘶𝘳𝘪𝘯𝘨 𝘵𝘩𝘦 𝘤𝘶𝘳𝘳𝘦𝘯𝘵 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳;

(𝘥) 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 𝘵𝘸𝘰 𝘱𝘦𝘳 𝘤𝘦𝘯𝘵.  𝘰𝘳 𝘮𝘰𝘳𝘦 𝘰𝘧 𝘪𝘵𝘴 𝘨𝘳𝘰𝘴𝘴 𝘵𝘶𝘳𝘯𝘰𝘷𝘦𝘳 𝘰𝘳 𝘵𝘰𝘵𝘢𝘭 𝘪𝘯𝘤𝘰𝘮𝘦 𝘰𝘳 𝘧𝘪𝘧𝘵𝘺 𝘭𝘢𝘬𝘩 𝘳𝘶𝘱𝘦𝘦𝘴 𝘰𝘳 𝘴𝘶𝘤𝘩 𝘩𝘪𝘨𝘩𝘦𝘳 𝘢𝘮𝘰𝘶𝘯𝘵 𝘢𝘴 𝘮𝘢𝘺 𝘣𝘦  𝘱𝘳𝘦𝘴𝘤𝘳𝘪𝘣𝘦𝘥, 𝘸𝘩𝘪𝘤𝘩𝘦𝘷𝘦𝘳 𝘪𝘴 𝘭𝘰𝘸𝘦𝘳, 𝘥𝘶𝘳𝘪𝘯𝘨 𝘵𝘩𝘦 𝘵𝘸𝘰 𝘪𝘮𝘮𝘦𝘥𝘪𝘢𝘵𝘦𝘭𝘺 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳𝘴 𝘰𝘳 𝘥𝘶𝘳𝘪𝘯𝘨 𝘵𝘩𝘦  𝘤𝘶𝘳𝘳𝘦𝘯𝘵 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳;

(𝘦) 𝘸𝘩𝘰, 𝘯𝘦𝘪𝘵𝘩𝘦𝘳 𝘩𝘪𝘮𝘴𝘦𝘭𝘧 𝘯𝘰𝘳 𝘢𝘯𝘺 𝘰𝘧 𝘩𝘪𝘴 𝘳𝘦𝘭𝘢𝘵𝘪𝘷𝘦𝘴—

      (𝘪) 𝘩𝘰𝘭𝘥𝘴 𝘰𝘳 𝘩𝘢𝘴 𝘩𝘦𝘭𝘥 𝘵𝘩𝘦 𝘱𝘰𝘴𝘪𝘵𝘪𝘰𝘯 𝘰𝘧 𝘢 𝘬𝘦𝘺 𝘮𝘢𝘯𝘢𝘨𝘦𝘳𝘪𝘢𝘭 𝘱𝘦𝘳𝘴𝘰𝘯𝘯𝘦𝘭 𝘰𝘳 𝘪𝘴

𝘰𝘳 𝘩𝘢𝘴 𝘣𝘦𝘦𝘯 𝘦𝘮𝘱𝘭𝘰𝘺𝘦𝘦 𝘰𝘧  𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘰𝘳 𝘪𝘵𝘴 𝘩𝘰𝘭𝘥𝘪𝘯𝘨,

𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳 𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘪𝘯 𝘢𝘯𝘺 𝘰𝘧 𝘵𝘩𝘦 𝘵𝘩𝘳𝘦𝘦

 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳𝘴 𝘪𝘮𝘮𝘦𝘥𝘪𝘢𝘵𝘦𝘭𝘺 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨 𝘵𝘩𝘦 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳 𝘪𝘯

          𝘸𝘩𝘪𝘤𝘩 𝘩𝘦 𝘪𝘴 𝘱𝘳𝘰𝘱𝘰𝘴𝘦𝘥 𝘵𝘰 𝘣𝘦 𝘢𝘱𝘱𝘰𝘪𝘯𝘵𝘦𝘥;

     (𝘪𝘪) 𝘪𝘴 𝘰𝘳 𝘩𝘢𝘴 𝘣𝘦𝘦𝘯 𝘢𝘯 𝘦𝘮𝘱𝘭𝘰𝘺𝘦𝘦 𝘰𝘳 𝘱𝘳𝘰𝘱𝘳𝘪𝘦𝘵𝘰𝘳 𝘰𝘳 𝘢 𝘱𝘢𝘳𝘵𝘯𝘦𝘳,

           𝘪𝘯 𝘢𝘯𝘺 𝘰𝘧 𝘵𝘩𝘦 𝘵𝘩𝘳𝘦𝘦 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳𝘴  𝘪𝘮𝘮𝘦𝘥𝘪𝘢𝘵𝘦𝘭𝘺 𝘱𝘳𝘦𝘤𝘦𝘥𝘪𝘯𝘨

𝘵𝘩𝘦 𝘧𝘪𝘯𝘢𝘯𝘤𝘪𝘢𝘭 𝘺𝘦𝘢𝘳 𝘪𝘯 𝘸𝘩𝘪𝘤𝘩 𝘩𝘦 𝘪𝘴 𝘱𝘳𝘰𝘱𝘰𝘴𝘦𝘥 𝘵𝘰 𝘣𝘦 𝘢𝘱𝘱𝘰𝘪𝘯𝘵𝘦𝘥, 𝘰𝘧—

         (𝘈) 𝘢 𝘧𝘪𝘳𝘮 𝘰𝘧 𝘢𝘶𝘥𝘪𝘵𝘰𝘳𝘴 𝘰𝘳 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘴𝘦𝘤𝘳𝘦𝘵𝘢𝘳𝘪𝘦𝘴 𝘪𝘯 𝘱𝘳𝘢𝘤𝘵𝘪𝘤𝘦 𝘰𝘳

𝘤𝘰𝘴𝘵 𝘢𝘶𝘥𝘪𝘵𝘰𝘳𝘴 𝘰𝘧 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺  𝘰𝘳 𝘪𝘵𝘴 𝘩𝘰𝘭𝘥𝘪𝘯𝘨, 𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳

𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺; 𝘰𝘳

          (𝘉) 𝘢𝘯𝘺 𝘭𝘦𝘨𝘢𝘭 𝘰𝘳 𝘢 𝘤𝘰𝘯𝘴𝘶𝘭𝘵𝘪𝘯𝘨 𝘧𝘪𝘳𝘮 𝘵𝘩𝘢𝘵 𝘩𝘢𝘴 𝘰𝘳 𝘩𝘢𝘥 𝘢𝘯𝘺 𝘵𝘳𝘢𝘯𝘴𝘢𝘤𝘵𝘪𝘰𝘯 𝘸𝘪𝘵𝘩 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘪𝘵𝘴  𝘩𝘰𝘭𝘥𝘪𝘯𝘨, 𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳 𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘢𝘮𝘰𝘶𝘯𝘵𝘪𝘯𝘨 𝘵𝘰 𝘵𝘦𝘯 𝘱𝘦𝘳 𝘤𝘦𝘯𝘵. 𝘰𝘳 𝘮𝘰𝘳𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘨𝘳𝘰𝘴𝘴 𝘵𝘶𝘳𝘯𝘰𝘷𝘦𝘳 𝘰𝘧 𝘴𝘶𝘤𝘩 𝘧𝘪𝘳𝘮;

      (𝘪𝘪𝘪) 𝘩𝘰𝘭𝘥𝘴 𝘵𝘰𝘨𝘦𝘵𝘩𝘦𝘳 𝘸𝘪𝘵𝘩 𝘩𝘪𝘴 𝘳𝘦𝘭𝘢𝘵𝘪𝘷𝘦𝘴 𝘵𝘸𝘰 𝘱𝘦𝘳 𝘤𝘦𝘯𝘵. 𝘰𝘳

𝘮𝘰𝘳𝘦 𝘰𝘧 𝘵𝘩𝘦 𝘵𝘰𝘵𝘢𝘭 𝘷𝘰𝘵𝘪𝘯𝘨 𝘱𝘰𝘸𝘦𝘳 𝘰𝘧 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺; 𝘰𝘳

      (𝘪𝘷) 𝘪𝘴 𝘢 𝘊𝘩𝘪𝘦𝘧 𝘌𝘹𝘦𝘤𝘶𝘵𝘪𝘷𝘦 𝘰𝘳 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳, 𝘣𝘺 𝘸𝘩𝘢𝘵𝘦𝘷𝘦𝘳 𝘯𝘢𝘮𝘦 𝘤𝘢𝘭𝘭𝘦𝘥,𝘰𝘧 𝘢𝘯𝘺 𝘯𝘰𝘯𝘱𝘳𝘰𝘧𝘪𝘵 𝘖𝘳𝘨𝘢𝘯𝘪𝘴𝘢𝘵𝘪𝘰𝘯 𝘵𝘩𝘢𝘵 𝘳𝘦𝘤𝘦𝘪𝘷𝘦𝘴 𝘵𝘸𝘦𝘯𝘵𝘺-𝘧𝘪𝘷𝘦 𝘱𝘦𝘳 𝘤𝘦𝘯𝘵.

             𝘰𝘳 𝘮𝘰𝘳𝘦 𝘰𝘧 𝘪𝘵𝘴 𝘳𝘦𝘤𝘦𝘪𝘱𝘵𝘴 𝘧𝘳𝘰𝘮 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘢𝘯𝘺 𝘰𝘧 𝘪𝘵𝘴

             𝘱𝘳𝘰𝘮𝘰𝘵𝘦𝘳𝘴, 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳𝘴 𝘰𝘳 𝘪𝘵𝘴 𝘩𝘰𝘭𝘥𝘪𝘯𝘨, 𝘴𝘶𝘣𝘴𝘪𝘥𝘪𝘢𝘳𝘺 𝘰𝘳 𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦

            𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘰𝘳 𝘵𝘩𝘢𝘵 𝘩𝘰𝘭𝘥𝘴 𝘵𝘸𝘰 𝘱𝘦𝘳 𝘤𝘦𝘯𝘵. 𝘰𝘳 𝘮𝘰𝘳𝘦 𝘰𝘧 𝘵𝘩𝘦  𝘵𝘰𝘵𝘢𝘭

            𝘷𝘰𝘵𝘪𝘯𝘨 𝘱𝘰𝘸𝘦𝘳 𝘰𝘧 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺; 𝘰𝘳

  (𝘧) 𝘸𝘩𝘰 𝘱𝘰𝘴𝘴𝘦𝘴𝘴𝘦𝘴 𝘴𝘶𝘤𝘩 𝘰𝘵𝘩𝘦𝘳 𝘲𝘶𝘢𝘭𝘪𝘧𝘪𝘤𝘢𝘵𝘪𝘰𝘯𝘴 𝘢𝘴 𝘮𝘢𝘺 𝘣𝘦 𝘱𝘳𝘦𝘴𝘤𝘳𝘪𝘣𝘦𝘥”

Independent directors are vital for maintaining a balance of power within the boardroom. They are not just passive observers; they actively participate in board decision-making processes. Their independence from the management ensures that decisions are made in the best interest of the company and its shareholders, rather than being influenced by personal or executive agendas. Independent directors provide a fresh perspective and bring diverse skills and experiences to the board, which can be invaluable in guiding strategic decisions and mitigating risks.

THE ROLE & RESPONSIBILITIES OF INDEPENDENT DIRECTORS

The role of independent directors has changed over time as businesses have evolved. In the past, company boards were mainly made up of insiders and top executives. But after scandals like Enron in the early 2000s, things changed. Laws like the Sarbanes-Oxley Act required more independent directors on boards to make them more accountable.^[3] Independent directors play a crucial role in governance and play a critical role in promoting corporate integrity, accountability, and long-term sustainability. They are expected to provide unbiased and objective judgment on corporate affairs, free from any conflicts of interest that could affect their decision-making. Some key roles and responsibilities of independent directors include ^[4] :

1. Governance and Oversight.
2. Strategy and Planning for the development of the company.
3. It is identifying and mitigating risks that could impact the company’s operations or reputation.
4. Overview company’s Audit and Financial Report process to ensure it is accurate and transparent.
5. Addressing Shareholder concerns and communicating to the board of directors.
6. Ensuring Ethical Conduct.

REGULATORY FRAMEWORK IN INDIA

The role of independent directors in India is governed by the Companies Act, of 2013, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. These regulations lay down the eligibility criteria for independent directors, their appointment process, roles, responsibilities, and the code of conduct they are expected to adhere to.

As per the Companies Act, every listed public company shall have at least one-third of the total number of its directors as independent directors. For an unlisted company, as per Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014, The Public companies having a paid-up share capital of ₹10 crores or more, The Public Companies with a turnover of ₹100 crore or more and the Public Companies with aggregate outstanding loans, debentures and deposits exceeding ₹50 crores, all these classes of companies shall have at least 2 directors as independent directors.^[5]

INDEPENDENT  DIRECTORS  AND  THEIR ROLE IN CORPORATE  GOVERNANCE

Governance, it is said, is about ‘steering’ a company in the right direction. The former SEBI Chairman, Mr M. Damodaran, described corporate governance as a continuing process beyond the scope of mere legislation^[6]. What he meant was that companies shouldn’t just follow the basic rules set by the government when it comes to how they run things. They need to go beyond that and adopt good practices even without the threat of punishment. Without these good practices, companies won’t make as much profit as they could. The former Chairman talked about how independent directors, who bring different perspectives, help the Board make better decisions.

Corporate governance is like the rules and systems that guide how a company is run. Some see it as a journey that’s always evolving, not just a fixed destination. Others compare it to being a trustee, meaning those in charge must act in the best interest of everyone involved. But no matter how it’s seen, the main goal is the same: to make sure the company is managed well and fairly. Independent directors, who aren’t tied to the company, play a crucial role in making sure things are done right. Independent directors are important for making sure that boards are accountable, which is crucial for good corporate governance. A study in the Journal of Financial Economics showed that boards with more independent directors do a better job of watching over things and are less likely to have financial problems.^[7]

In India, independent directors play a crucial role in corporate governance, which refers to the system of rules, practices, and processes by which a company is directed and controlled. Independent directors are appointed to the boards of companies to ensure that there is a balance of power, accountability, and fairness in decision-making. Their primary role is to provide objective and unbiased judgment on issues of strategy, performance, risk management, and compliance.

In taking consideration of the objectives the main key functions of Independent Directors concerning corporate governance are as follows:

I, Providing independent oversight

One of the key functions of independent directors is to act as a check on the executive management of the company. Independent directors are expected to review and evaluate the performance of the company’s management, ensuring that it is in line with the company’s goals and objectives. They are expected to bring an independent and outside perspective to board discussions and decisions, which helps in preventing conflicts of interest and promoting transparency.

II, Risk Management

Independent directors also play a crucial role in safeguarding the interests of minority shareholders and ensuring that the company operates in the best interests of all stakeholders. According to a report by Deloitte, effective risk oversight by independent directors is linked to improved organizational resilience^[8]. They do this by actively working with risk committees and regularly checking for risks. This helps create a culture where everyone is aware of risks. This careful approach is crucial for protecting the interests of everyone involved with the company and keeping the company healthy.

III, Ensuring Compliance

The Companies Act, 2013, and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, have laid down specific requirements and guidelines for the appointment, roles, responsibilities, and conduct of independent directors. These regulations aim to enhance the effectiveness of independent directors and strengthen corporate governance practices in Indian companies. To enforce compliance with corporate governance standards, regulatory authorities such as SEBI and the Ministry of Corporate Affairs (MCA) have established stringent enforcement mechanisms and penalties for non-compliance. These include fines, debarment of directors, and delisting of companies for serious violations.

IV, Advising on Strategic Matters

Independent directors play an important role in making big decisions for a company. They offer fresh ideas and opinions that are not influenced by the company’s internal biases. This helps ensure that the company makes choices that are good for its long-term future. The significance of this role is highlighted by studies such as the one published in the Strategic Management Journal, which found that boards with engaged independent directors were associated with better strategic outcomes. Independent directors use their different skills and experiences to give helpful advice on how the company should plan and carry out its long-term goals.

These functions of independent directors are critical for promoting transparency, accountability, and ethical behavior in corporate governance. They help protect shareholder interests, enhance board effectiveness, and ensure that the company is managed responsibly. Their role is essential for building trust with stakeholders and maintaining the long-term sustainability of the organization.

TERM LIMIT FOR INDEPENDENT DIRECTORS

Section 149 (10) of The Companies Act, 2013 states^[9] that “𝘢𝘯 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘴𝘩𝘢𝘭𝘭 𝘩𝘰𝘭𝘥 𝘰𝘧𝘧𝘪𝘤𝘦 𝘧𝘰𝘳 𝘢 𝘵𝘦𝘳𝘮 𝘶𝘱 𝘵𝘰 𝘧𝘪𝘷𝘦 𝘤𝘰𝘯𝘴𝘦𝘤𝘶𝘵𝘪𝘷𝘦 𝘺𝘦𝘢𝘳𝘴 𝘰𝘯 𝘵𝘩𝘦 𝘉𝘰𝘢𝘳𝘥 𝘰𝘧 𝘢 𝘤𝘰𝘮𝘱𝘢𝘯𝘺, 𝘣𝘶𝘵 𝘴𝘩𝘢𝘭𝘭 𝘣𝘦 𝘦𝘭𝘪𝘨𝘪𝘣𝘭𝘦 𝘧𝘰𝘳 𝘳𝘦𝘢𝘱𝘱𝘰𝘪𝘯𝘵𝘮𝘦𝘯𝘵 𝘰𝘯 𝘱𝘢𝘴𝘴𝘪𝘯𝘨 𝘰𝘧 𝘢 𝘴𝘱𝘦𝘤𝘪𝘢𝘭 𝘳𝘦𝘴𝘰𝘭𝘶𝘵𝘪𝘰𝘯 𝘣𝘺 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘢𝘯𝘥 𝘥𝘪𝘴𝘤𝘭𝘰𝘴𝘶𝘳𝘦 𝘰𝘧 𝘴𝘶𝘤𝘩 𝘢𝘱𝘱𝘰𝘪𝘯𝘵𝘮𝘦𝘯𝘵 𝘪𝘯 𝘵𝘩𝘦 𝘉𝘰𝘢𝘳𝘥’𝘴 𝘳𝘦𝘱𝘰𝘳𝘵.” Further under section 149(11)^[10] mentions that “𝘕𝘰 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘴𝘩𝘢𝘭𝘭 𝘩𝘰𝘭𝘥 𝘰𝘧𝘧𝘪𝘤𝘦 𝘧𝘰𝘳 𝘮𝘰𝘳𝘦 𝘵𝘩𝘢𝘯 𝘵𝘸𝘰 𝘤𝘰𝘯𝘴𝘦𝘤𝘶𝘵𝘪𝘷𝘦 𝘵𝘦𝘳𝘮𝘴, 𝘣𝘶𝘵 𝘴𝘶𝘤𝘩 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘴𝘩𝘢𝘭𝘭 𝘣𝘦 𝘦𝘭𝘪𝘨𝘪𝘣𝘭𝘦 𝘧𝘰𝘳 𝘢𝘱𝘱𝘰𝘪𝘯𝘵𝘮𝘦𝘯𝘵 𝘢𝘧𝘵𝘦𝘳 𝘵𝘩𝘦 𝘦𝘹𝘱𝘪𝘳𝘢𝘵𝘪𝘰𝘯 𝘰𝘧 𝘵𝘩𝘳𝘦𝘦 𝘺𝘦𝘢𝘳𝘴 𝘰𝘧 𝘤𝘦𝘢𝘴𝘪𝘯𝘨 𝘵𝘰 𝘣𝘦𝘤𝘰𝘮𝘦 𝘢𝘯 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳: 𝘗𝘳𝘰𝘷𝘪𝘥𝘦𝘥 𝘵𝘩𝘢𝘵 𝘢𝘯 𝘪𝘯𝘥𝘦𝘱𝘦𝘯𝘥𝘦𝘯𝘵 𝘥𝘪𝘳𝘦𝘤𝘵𝘰𝘳 𝘴𝘩𝘢𝘭𝘭 𝘯𝘰𝘵, 𝘥𝘶𝘳𝘪𝘯𝘨 𝘵𝘩𝘦 𝘴𝘢𝘪𝘥 𝘱𝘦𝘳𝘪𝘰𝘥 𝘰𝘧 𝘵𝘩𝘳𝘦𝘦 𝘺𝘦𝘢𝘳𝘴, 𝘣𝘦 𝘢𝘱𝘱𝘰𝘪𝘯𝘵𝘦𝘥 𝘪𝘯 𝘰𝘳 𝘣𝘦 𝘢𝘴𝘴𝘰𝘤𝘪𝘢𝘵𝘦𝘥 𝘸𝘪𝘵𝘩 𝘵𝘩𝘦 𝘤𝘰𝘮𝘱𝘢𝘯𝘺 𝘪𝘯 𝘢𝘯𝘺 𝘰𝘵𝘩𝘦𝘳 𝘤𝘢𝘱𝘢𝘤𝘪𝘵𝘺, 𝘦𝘪𝘵𝘩𝘦𝘳 𝘥𝘪𝘳𝘦𝘤𝘵𝘭𝘺 𝘰𝘳 𝘪𝘯𝘥𝘪𝘳𝘦𝘤𝘵𝘭𝘺”

CHALLENGES FACED BY INDEPENDENT DIRECTORS

In India, independent directors face several challenges in fulfilling their responsibilities, despite the regulatory framework and guidelines in place. These challenges stem from various factors such as board dynamics, regulatory environment, company culture, and external pressures. One of the primary challenges faced by independent directors is the issue of board composition and dynamics. Often, boards are dominated by promoters or executives, which can lead to conflicts of interest and undermine the independence of directors. Independent directors may find it challenging to voice their opinions and dissenting views in such situations, especially when they are in the minority. This can hinder their ability to effectively oversee the management and ensure that the interests of all stakeholders are protected.

Another significant challenge is the lack of adequate information and resources available to independent directors. In many cases, independent directors are not provided with timely and accurate information about the company’s operations, finances, and strategic decisions. This makes it difficult for them to make informed decisions and fulfill their oversight responsibilities. Independent directors may also lack the necessary expertise and experience to understand complex financial and legal matters, further complicating their role.

The regulatory environment in India poses additional challenges for independent directors. While there are regulations in place to govern the conduct of independent directors, enforcement mechanisms are often weak. Independent directors may face legal and reputational risks if they raise concerns about corporate governance issues, which can deter them from fulfilling their duties effectively. Moreover, the regulatory framework is constantly evolving, making it challenging for independent directors to stay updated with the latest requirements and guidelines. In many cases, companies may have a culture resistant to change or transparency, making it difficult for independent directors to challenge the status quo. Independent directors may face pressure from management or other board members to conform to the prevailing culture, which can compromise their independence and objectivity.

External pressures, such as shareholder activism and media scrutiny, can also impact the role of independent directors. Independent directors may face pressure from external stakeholders to act in their interests, which can conflict with their duty to act in the best interests of the company as a whole. This can put independent directors in a difficult position, where they must balance competing interests while upholding their fiduciary duties.

CONCLUSION

In conclusion, the crucial role of independent directors in corporate governance cannot be overstated. As guardians of transparency, accountability, and ethical conduct within companies, independent directors navigate complex landscapes to ensure that the interests of all stakeholders are protected and the long-term sustainability of organizations is secured.

Despite the challenges they face, including board dynamics, regulatory environments, and external pressures, independent directors remain steadfast in their commitment to upholding good governance practices. Their functions, from providing independent oversight to advising on strategic matters, are essential for promoting trust, enhancing board effectiveness, and fostering a culture of integrity within companies.

As we reflect on the lessons learned from corporate scandals and regulatory reforms, it becomes evident that the presence of independent directors is not just a regulatory requirement but a fundamental pillar of corporate governance. Moving forward, continued efforts to empower independent directors, strengthen regulatory frameworks, and foster a culture of accountability will be essential in ensuring that companies operate with integrity and fulfill their obligations to shareholders and society at large. In this journey towards better corporate governance, independent directors will continue to serve as beacons of integrity, guiding companies toward sustainable success in an ever-evolving business landscape.

Reference(s):

^[1] Manshu Garg, “Satyam Scam: Discover What Exactly Happened In Satyam Case” (September 10, 2023)

<https://www.linkedin.com/pulse/satyam-scam-discover-what-exactly-happened-case-manshu-garg>

accessed 2nd April 2024

^[2] See section 149(6) of the Companies Act, 2013

^[3] See Sarbanes-Oxley (SOX) Act of 2002

^[4] CS JASPAL SINGH DHANJAL, “INDEPENDENT DIRECTORS under Companies Act, 2013” (March 1, 2020)  ICSI

<https://www.icsi.edu/media/filer_public/78/8b/788b6cf7-7e67-4131-b883-fe4292b4c475/independent_director_under_companies_act_2013.pdf>  accessed 2nd April 2024

^[5] See Rule 4 of the Companies (Appointment and Qualification of Directors) Rules, 2014

^[6] Prime Directors, “CII Summit Stresses on Importance of Independent Directors in

Corporate Governance”, (September 14, 2005)

<http://www.primedirectors.com/PressReports/CII2.pdf> accessed 1st April 2024

^[7] Ronald W. Masulis and Emma Jincheng Zhang, “How valuable are independent directors? Evidence from external distractions” Journal of Financial Economics (June 2019)

<https://www.sciencedirect.com/science/article/pii/S0304405X18303179> accessed 3rd April 2024

^[8] Dr. Michael Gelles, James Turgal, Wendy Overton and Bob Lamm, “US

Crisis resilience and the board—Taking risk oversight to the next level” (March 2019)

<https://www2.deloitte.com/content/dam/Deloitte/es/Documents/governance-risk-compliance/Deloitte-ES-agenda-consejo.pdf>  accessed 3rd April 2024

^[9]  See Section 149(10) of Companies Act, 2013

^[10] See Section Section 149(11) of Companies Act, 2013