Strengthening the independent directors mechanism

An Independent director is one of the key personnel in the administration and management of the a company’s affairs. Such director holds the responsibility to ensure that corporate affairs are conducted in a transparent manner leaving no latitude for any fraudulent transactions and uplifts the corporate governance standards of the company.

Companies often ignore the importance of the character of the independent director in the conduct of the corporate affairs and compliance with legal and regulatory requirements.

The existing tendency amid companies is to employ the family members and friends of the promoters/upper management personnel as independent directors so that the decisions and actions of management aren’t questioned and management will run the company administration at their will without glitches and headaches from the independent directors.

Any board meeting amid such people will be more like a family/social gathering rather than company official meeting. Accordingly, any fraudulent transactions and mismanagement of funds will go unnoticed into dust causing huge monetary losses to all the stakeholders involved.

Despite engaging talented and competent professionals (with high ethical values and uncompromising attitude towards discharge of the duties conferred on them), certain companies are still falling short of performing their legal and regulatory obligations – the cause for such failure is same person acting as independent director in multiple companies hindering the knack of such persons in discharging their duties and obligations to the best of their ability.

The recent flurry of corporate frauds exposed the fact that most of the companies are not using the functionality of portals established with database of independent directors in the employment and engagement of the independent directors.

In this context, the Kotak Committee (constituted by the Securities Exchange Board of India) has made certain crucial recommendations in relation to the role of independent directors.

Gist of the recommendations made by the Kotak Committee is as follows:

·       With effect from April 1, 2020, no person is eligible to hold the designation of independent director in more than seven listed entities.

·       No person who is part of the promoter group can be appointed as an Independent Director.

·       Board interlocks should be avoided.

·       Top listed firms should have at-least one women independent director by April 1, 2019 and April 1, 2020 respectively.

The SEBI will enforce the recommendations of the Kotak Committee in a phase wise manner and if need be, fine tune such recommendations to evade conflict of interest with other laws in existence.

It is high time for companies to end the practice of employing family/friends/acquaints with promoters/upper management personnel as the independent director and to bring on board persons (high on professional ethics and uncompromising personality) to ensure that companies affairs are conducted in a transparent way and corporate governance standards of the companies are uplifted or else companies have to pay hefty price for failure to comply with laws and fraudulent transactions occurred due to the incompetency of the independent directors closely associated with the board members of the company.

Research inputs by Paruchuri Baswanth Mohan