Background
Ideally speaking Independent Directors play crucial roles in the governance of their companies. They bring in valuable, independent and objective judgements, views and opinions to the Board of Directors, {in short, the Board}, raise important questions on the functioning of the company and seek appropriate answers. They are presumed to keep the management vigilant and make them follow the best governance practices in the best interest of the company and in public interest.
Independent of whom
• Any person and more particularly corporate professionals dealing with companies and their Boards will be aware of the Independent Directors.
• As the name suggests, he is independent. But then the question arises - independent of whom? He is after all a part of the Board and his duties and responsibilities are towards the company through the Board process and even otherwise. So why he is termed as an independent director and why the law all over the world, seeks him and puts him in an onerous position of upholding, among others, the corporate governance?
Cannot be independent of Board
At the outset, one has to understand the relationship of the Board vis- a - vis the company. A Board is an integral part of the company entrusted with all the powers and duties of management and governance through the provisions of the company legislation, and, the Board functions accordingly. The directors of the Board collectively work together through meetings, physically or through circulation or electronically to enable it to function. Therefore individually the directors do not have any authority and duty unless delegated by the Board through resolutions in terms of the said legislation. Or the director is an executive director having powers through law and also by delegation.
Independent Directors must be free from Promoters
• The answer to the query as to from whom the director is to be independent would become apparent if one looks at the control models of companies.
• Under the Companies jurisprudence a company can be controlled through two routes, the first - equity control and the second - Board control, and generally both controls are interlinked.
• The equity control, i.e. holding the majority paid up equity share capital is the most critical and any person or group of persons holding such shares would be in a position to control the activities of the company. In this case control will be through voting at general body meetings wherein as per democratic methods all the decisions are passed by majority and those exercising majority votes can get them passed. The persons who can get such votes passed may be held or take the hue of promoters and are also the controlling shareholders. They may include directors, senior/ top management {in short, the promoters}.
• Under these circumstances, the promoters are capable of getting their individuals, who may be their relatives, friends, or any other connected person, appointed as directors on the Board through the general body meetings. So the effect would be that there could be directors on the Board who are appointed through the promoters’ benevolence. There is a possibility that they may constitute the majority of the Board. There is also likelihood that these directors may have allegiance to these promoters although not apparently evident. The Board control, therefore, becomes applicable here and such control might be in the hands of the promoters. This control also might be in addition to equity control.
• Though in terms of the Companies Act and all related company legislations as also through plethora of court cases, it is provided and held that the directors occupy a fiduciary position of trustees in relation to the company requiring to function in the best interest of the company, the fact emerges and the ground realities are that the directors whose appointments have been made possible because of the promoters, may, at times, look at the interest of such promoters instead of the company. By ensuring promoters’ interest, ultimately director’s own interest may be taken care. So the best interests of the company may not be always ensured and thus such directors may become partial and dependent on promoters. They, therefore, cannot be independent directors. Moreover the promoter himself or relatives or any of their connected people cannot be independent directors.
• These arguments have a fallacy, that is, the promoters are presumed to not act in the best interest of the company but only in their personal interest.
• On the other hand this argument is also true that where the company’s interests are taken care by the promoters, their own interest is also advanced so there is no reason why promoter should act against the interests of the company.
• However, many times the truth may be complex, varied & quite different.
• The net analysis however is that an Independent director is to be free from any direct or indirect connection with the promoters.
Independent Director must be free from substantial authority, benefits & involvements with the company
• There is another angle to the matter of independence of directors which is vis- a - vis the company and not the promoters. These are executive directors, such as Managing Director or Whole Time Directors who are director –cum- employees involved in day to day working of the company. They enjoy substantial authority and remuneration. Due to holding these positions of elaborate involvements and getting significant benefits and exercising significant powers, such persons cannot be expected to remain independent.
• Moreover, if an ordinary director has substantial or material pecuniary or shareholding interests in the company and/or receives benefits, directly or indirectly, he too cannot be presumed to be independent. In all these cases his personal interest may override the best interests of the company.
• Hence it is imperative that an Independent director should be free from the significant beneficial trappings of the company.
Independent Director must be free from third party
• In one more angle, if the director concerned is a nominee director of some institution, he will have to look after the interest of such institution and not the company; thereby he cannot be termed to be independent.
• Hence no third party should have any control over the Independent director which might go against the interests of the company .
Roadmap of independence
• From these ground realities and the paramount need to take care of the supreme interest of the company that the concept and legality of independent director has emerged.
• He is thus a director who is non executive, posses integrity, expertise and experience, holds no position, has no sizeable shareholding, gets no substantial benefits or powers, has no significant relationships with the company, much less the promoters, and also has no pertinent interest in any pecuniary matters of the company. Pertinently, the restriction goes beyond the company to its associate entities also. What's more neither his relatives nor connected persons should have any such relationships.
• He therefore functions without prejudice and also impartially for the paramount interest of the company as envisaged in all company legislations. He brings in corporate governance and best practices in the corporate world.
• Independent director is supposed to be the panacea to all governance ills of corporate. No doubt, this constitutes a utopian notion and in practice has many pitfalls, but that has not deterred the laws and practices to move towards this concept. This has been internationally established. In India this concept has found place statute books.
• The Clause 49 of the Listing Agreement has already provided for appointment of independent directors on the board of directors of listed companies since some years. Although erstwhile Companies Act 1956 did not provide for this concept, but the new Companies Act 2013 has now provided in great detail.
CONCLUSION
The subject of Independent Director has been deliberated, from time to time, by many high powered expert committees appointed by the Government, industry bodies, professional institutions etc., in the context of corporate governance. There has been wide acceptance of this concept and hence legislated. New laws in India bring in the hope that the Indian corporate will be better governed for all round advancements.
AMITAV GANGULY
CAclubindia
