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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