Role of Independent Director in Corporate Governance

Role of Independent Director in Corporate Governance

Pavan Kumar VijayManaging Director

Monday, April 10, 2023

Concept of Independent Director

Independent director means a director who is not connected or associated with the company in any manner and works only to safeguard the interest of members who individually cannot look after their interest.

Genesis

The concept of Independent director has been originated to drive the companies towards inculcating the concept of corporate governance in their management.

What is Corporate Governance???

“ Corporate Governance is the application of best

management practices, compliance of law in true

letter and spirit and adherence to ethical standards

for effective management and distribution of wealth

and discharge of social responsibility for sustainable

development of all stakeholders.”

-The Institute of Companies Secretaries of India

Corporate Governance Framework

Output – Input = Wealth Created ?

Sustainability

Happiness andProsperity of all

Stakeholders

Reinvestment

Distribu- tion

Research and DevelopmentHR DevelopmentInfrastructureRisk Management

SUPPLIERS Adequate ReturnsHUMAN ASSETS Adequate RemunerationCUSTOMERS Affordable PricesPUBLIC Payment of Taxes and Partnership in National Development Projects

Wealth Creation Wealth Management Wealth Sharing

EnhancedCapabilities

Best Management Practices are Vital Here Law and Ethics are Vital Here

Stakeholders in Value Chain

SUPPLIERS CUSTOMERSHUMAN RESOURCE

Supply Funds, Materials and Services

Value Addition and Management of Resources

Give Opportunity to Co. to Satisfy their Needs

Adequate Returns for Funds, Material and Services Supplied

Adequate Salary and Security for leading a Happy Life

Best Quality Products and Customer Care at Minimum Prices

ROLE OF STAKEHOLDERS

EXPECTATIONS OF STAKEHOLDERS

Potential Suppliers, Human Resources and Customers

Biological, Economic and Cultural EnvironmentPUBLIC

PUBLIC EXPECTS PARTNERHIP FOR SUSTAINABLE DEVELOPMENT

Satyam Vada Dharmam Chara

- Taittariya Upanishad

“Forever speak the truth and follow the

dharma”

Truth : Disclosure of Actual State of Affairs

(Transparency in operations and transactions)

Dharma : “Dharma is for the stability of

society, the maintenance of social order and the general well-being and progress of humankind.”

- Karna Parva of the Mahabharata. Verse-58 in Chapter 69

Corporates are also expected to use their

Capacity, Knowledge and Resources

Maximisation of stakeholders’ value and well-being and progress of humankind

TOWARDS

THROUGH

Transparency, accountability and truthful disclosure of state of affairs

Dharma

Truth

This is our own age old mantra of

Good Governance

Companies that have followed theseprinciples of

Corporate Governancehave

Consistently earned high returns, increased their net worth and

enhanced their shareholders wealth

..and accomplished

WINNINGEMPLOYEES

WINNINGEMPLOYEES

GROWINGINVESTORS

GROWINGINVESTORS

DELIGHTEDCUSTOMERS

DELIGHTEDCUSTOMERS

TRUSTEDSUPPLIERS

TRUSTEDSUPPLIERS

SATISFIEDGOVERNMENT AND

REGULATORS

SATISFIEDGOVERNMENT AND

REGULATORS

HAPPYSOCIETY

HAPPYSOCIETY

Who is

Independent Director???

One who has Independency of

Judgment

Vs.

Not having any material pecuniary relationships or

transactions with the company, its promoters, its directors, its

senior management or its holding company, its subsidiaries and

associates.

Not related to promoters or persons occupying management

positions at the board level or at one level below the board

Not been an executive of the company in the immediately

preceding three financial years

Definition of Independent Director – Clause 49 (1)(A)(iii) of Listing Agreement

Definition of Independent Director – Clause 49 (1)(A)(iii) of Listing Agreement

Not associated with the statutory audit firm or the legal

firm having material association with the company.

Not a material supplier, service provider or customer or a

lessor or lessee of the company.

Not owning two percent or more of the block of voting

shares

Directorships Matrix

ExecutiveGroup

(Salaried)

Promoter Group

Independent Group

Managing / Whole Time

Director

Director

Chairman Executive Chairman

Executive

/Non-Executive Chairman

Non-Executive Chairman

Position of Independent Director

Executive Director

Owner DirectorIndependent

Director

Board of Directors

Interest of Company

Interest of Shareholder

Interest of Stakeholders

Balancing of Interests

Primary Duty

Enhanced Responsibilit

y

Independency of Director

Concept & Reality

Concept

• Legal▫Disinterested director▫Unbiased decisions▫Balancing of conflicting interests▫Protection of shareholders’ interests▫Protection of stakeholders’ interests ▫Protection of whistleblower’s interests

• Managerial ▫Bring expertise in the Board composition▫ Infusion of new ideas▫Develop a system in the Board Culture

Reality

Independent Director

Disinterested Director

Uninterested Director

No Yes

Compliance in Spirit Compliance in Letter

Disinterested Director

Expert in a particular discipline

Uninterested Director

Friend or relative not coming u/s 6 of Companies Act

Reality – Appointment of Independent Director

Reality – Appointment of Independent Director

Compliance in Spirit Compliance in Letter

Knowledge about the Company’s business

Precedence to knowledge over names

Capability to dissent

Not concerned with the Company’s business

Precedence to name over knowledge

Yes- Man

Reality – Working of Independent Director

Compliance in Spirit Compliance in Letter

Provides independent assessment of business decisions.

Provides expert comments on the subject

Acts as per the whims of management.

Silent observer at the Board meetings.

Compliance in Spirit Compliance in Letter

Informed decisions

Ensures unbiased decisions

Decision on selective information.

Independent status takes a backseat.

Reality – Working of Independent Director

Independent Director

Critical Issues

Those who are eligible, have no time.

Those who have time, are not eligible.

Ingredients of Independent Directors

BUT

Insufficient knowledge regarding the business

Reliance on Executive Director/CEO for information

Selective information sharing

Lack of understanding

Informed Decisions – Not possible

No legal requirement for qualification of Independent Director except for the member of Audit Committee who shall be financial expert.

Quality & ingredients are subjective phenomenon.

No independent appointment.

Capability & Capacity

In 60% companies, Board consists of shareholders holding more

than 50% stake.

Unbalanced Risk & Reward Equation

≠

Compensation

Independent Director

Rights & Duties

Rights & Authorities

• Right to attend and vote in every Board

Meeting.

• Right to be appointed on various

committees.

• Right to demand information on every

business matter.

• Right to seek clarifications/justifications

• Right to dissent.

Duties & Responsibilities

Primary Duties Enhanced Responsibilities

• Act in the best interests of the

company

• Safeguard the interests of the

stakeholders

• Attend Board Meetings and

participate in decisions

• Avoid conflict situations

• Not seek personal gains

• Maintain confidentiality

• Fiduciary duty

• Discharge duties required in

specific committees of the

Board

● To compel directors to act in

accordance with the strict terms

of their mandate

● To compel them to exercise care

and skill in carrying out their

various functions

● To compel them to use their wide

discretionary powers in good

faith and proper purpose, &

● Finally, to compel them to act

loyally in advancing the interest

of their company.

Independent Director

Corporate Issues & Regulator perspective

Corporate Issues

• Preference of Stakeholders’ interest above

the interest of Company.

• Forces disclosure of confidential

information.

• Interferes in Management Decisions.

• Acts as Bloodhound dog.

Regulator Perspective

• Independence director has primary duty towards the

Company and enhanced responsibility towards

stakeholders.

• Reduce conflict of interests of management.

• Ensures protection of wider interest of Company and

stakeholders.

• Ensures transparency of information.

• Provides independent Assessment while evaluating

business decisions as an independent Business Advisor.

• Acts as a watchdog.

Independent Director in a JV

JV Company

Partner A Partner B

Interest of Partner A

Interest of Partner B

Interest of Company &

Stakeholders

Reconciliation of Interest

In this way

INDEPENDENT DIRECTOR

Ensures

Application of best management practices

Compliance of law in true letter and spirit

Adherence to ethical standards

Discharge of social responsibility for sustainable development of all stakeholders

Distribution of wealth

And

In other words,

CORPORATE GOVERNANCE

Corporate Governance at Infosys

And

That’s what makes

Infosys

A value driven organization

CRISIL – CRISIL

GVC Level 1

ICRA – CGR 1