Essay: The role of an independent director

Corporates these days are expected to use their capacity, knowledge towards maximization of the stake holder’s value and also towards the well being of the society. They do this through transparency, truthful disclosure of all the state of affairs. According to SEBI , the expression ”independent director” refers to a non-executive director of a company who apart from receiving the director’s remuneration, does not have any material pecuniary relationships or transaction with the company, its promoters, directors, senior management, holding company or its subsidiaries and associates, which may impact his/her independence. An independent director is someone who has independency of judgment, absence of material relationship, pecuniary relationship with the company. The Companies Act,2013  imposes a specific obligation on listed companies to have at least one third of the total number of directors as independent directors and, also empowers Central Government to include other class/classes of companies within the scope of this requirement.
The part of an independent director is thought to be of an extraordinary essentialness. The rules, part and capacities and obligations and so forth are extensively set out in a code portrayed in Schedule IV of the Act, 2013. The code sets out certain basic capacities like defending the enthusiasm of all partners, especially the minority holders, blending the clashing enthusiasm of the partners, dissecting the execution of administration, intervening in circumstances like clash in the middle of administration and the shareholder’s advantage and so forth. The code likewise sets out certain essential obligations like staying with themselves upgraded about the and the outside environment in which it works, not unveiling vital and private data of the organization unless affirmed by the board or required by law, effectively taking an interest in panels of the board in which they are director or individuals, keeping themselves overhaul and undertaking proper affectation and reviving their insight, aptitudes and nature with the organization, frequently go to the general gatherings of the organization and so forth.
Having an independent director is essential for any company it helps to bring an outside viewpoint on system and control and also helps to include new aptitudes and learning that won’t be accessible inside of the firm. Independence also helps the director to be objective and also evaluate the company’s performance without any conflict of interest.
Lets take examples of Lehman brothers and World com to rightly explain the need and importance of independent directors and good corporate governance.
Lehman Brothers began in 1844 as a little basic need and dry merchandise store set up by Henry Lehman. After two decades they exchanged cotton, moved to New York and built up New York Cotton Exchange. After this occasions Lehman proceeded out and about of progress and turned into the fourth-biggest American venture bank. They survived the World wars and the Great Depression, be that as it may, the breakdown on the U.S. lodging business sector pushed Lehman Brothers to the edge of total collapse. Lehman Brothers Board of Directors was made out of ten individuals. The Chairman and CEO was Richard S. Fuld, Jr. also, included eight free chiefs as per NYSE. In any case, behind the majority of that there was a truth, that nine out of 10 executives were resigned. In addition, their average age were 68.4 years (four of them were more than 75 years), just two of them have direct involvement in monetary administration industry furthermore, stand out of them had current budgetary part learning. Moreover, one was U.S. Naval force officer, another showy maker. These independent directors hence didn’t ensure the proper working of the operations of the company and how things should have been. There wasn’t any strategic guidance for the company and its operations and hence there was no accountability of the board to the company. There wasn’t any disclosure of how the operations were, or how the company was holding up regarding the final situation, the performance and the ownership. The independent directors had a lack of experience on financial matters. The Lehman brothers had issues with the corporate governance arrangements and also failure to protect against excessive risk taking.
Worldcom, a telecommunication giant also failed because of the largest accountancy frauds in the American history, which led to its bankruptcy. WorldCom made genuine accounting misrepresents that disguised the verifiably perilous cash related condition of the association. The WorldCom case has become a kind of poster child and a genuine case study in the failure of corporate governance, in this new century-Dick Thornburgh, Former Attorney General of the United States and Court-Appointed Examiner in the WorldCom Bankruptcy Proceedings. There was a toxic culture of the senior management; their actions were not completely legal. They also set unrealistic financial targets for the company. There were 2 versions of accounts i.e. the actual version and one shown to investors. Not only this, the reserve accounts were manipulated to increase the actual figures. The vast majority of the deviations from legitimate corporate conduct of which we observed came about because of the disappointment of Board of Directors to perceive, and to bargain viably with, misuse reflecting what our reports distinguished as a “society of eagerness” inside of the organization’s top administration. Others came about because of an wretched disappointment of dependable persons inside of the organization to satisfy their guardian commitments to shareholders. A third contributing component was a absence of straightforwardness between senior administration and the Company’s top managerial staff. In the last examination, what we saw was a finished breakdown of the arrangement of corporate administration. The checks and equalizations intended to avoid wrongdoing and abnormalities essentially fizzled to work.
Hence we would conclude by pointing out the role and importance of independent directors. The essential errand of autonomous executives is to embrace an oversight part and to guarantee that the corporate resources are utilized just for the organization. This errand incorporates: gotten comfortable with the basics of the business in which the organization is locked in and keep on being educated about the exercises of the organization, checking on the records of the organization, calling for extra data where the records indicate not exactly the full picture, going about as a keep an eye on proposed corporate methodology remembering the financial matters of any potential exchange, consistent participation at executive gatherings to guarantee capacity to for the most part screen of corporate undertakings and approaches and taking an interest in the arrangement, appraisal and compensation of executives for the most part. The vicinity of Independent Directors on the Board of an organization would enhance corporate administration, especially for open organizations or organizations with a huge open hobby. Corporate specialists felt that autonomous chiefs would have the capacity to convey a component of objectivity to the Board process in the general enthusiasm of the organization and in this manner to the regale of minority hobbies and little shareholders. At long last it was felt by the corporate specialists that the incorporation of free chief frequently brings an alternate perspective, a more educated perspective, and a more expert perspective. In India, in the last 10 years or so, corporate governance and the institution of independent directors have evolved. Two factors have played a major role. Introduction of Clause 49 by SEBI in 2004 and the Satyam fraud in 2009 have resulted in improvements in corporate governance and the role of independent directors. The part of free executive, to a limited extent, is to go about as a guard dog on the promoters and the administration of the organization and secure minority shareholders’ hobbies.