Why do promoters need Independent Directors?

Neha Shah

10 Jun 2021

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With an intention to reinforce the role of independent directors, market regulator SEBI recently recommended a few changes in the rules dealing with the selection, removal, remuneration as well as the role of independent directors as a part of Audit Committee.

The concept of Independent Directors originally emerged from the need to have a certain number of directors on the Board who would think and act independently to bring about a healthy balance between the interests of the promoters and other stakeholders including minority and small shareholders. Independent Directors are considered as a vital component in the overall Corporate Governance framework in Indian boardrooms. SEBI and MCA have over the years left no stone unturned to strengthen the institution of Independent Directors by recommending various committees and introducing a separate Code of Conduct to govern the role of independent directors in the Company. However, despite taking various serious measures, concerns around the efficacy of independent directors as a part of corporate governance framework still continues.Data reveals that the present system of appointment of independent directors is extremely influenced by the promoters which ultimately seems to hamper the essence of independence of thinking and decision-making capabilities of independent directors. The entire concept of appointment of independent director goes for a toss if the decisions on key issues are influenced by promoters or other directors of the Company. However, considering the other side of the coin, promoters need independent directors on the Board. There have been multiple examples in Indian boardrooms wherein independent directors have given their viewpoints with complete independence irrespective of what the promoter or director thinks.Certainly, at this point in time, companies and its promoters must rethink on the existence of independent directors on Board as well as their roles and responsibilities. It is time how the promoters can change their mindset and analyse in detail the important check boxes before onboarding independent directors which will help them make a fair decision and gain stakeholder trust.

Some of these check points could be:

Independent Directors as a Think Tank – Independent directors are considered to be the custodian of corporate governance in organizations and their appointment as vibrant think tanks can add immense value to the Board in the long run;

Independence to ask questions to the Management – Independent directors are conceptually appointed to put forth independent view point on board matters of the Company. If they are fearless to voice out their concerns and seek clarifications from the management, the display of values like integrity and fairness helps stakeholders as well as promoters build trust on independent directors;Industry connects – We say ‘your network is your net worth’. Similar principle applies to independent directors and this is the prime duty of any promoter to background check the connects of independent directors and what their connects could bring to the table as a value addition;

Wealth of experience – In addition to the legal requirements stated under Companies Act, 2013, Schedule IV and SEBI LODR, experience is something that completely varies from a person to person. Therefore, counting on rich experiences of independent directors and analysing its usage in current board practices is one of the crucial checkpoints that every promoter must do before onboarding independent directors;

Act more than merely watchdogs – Though independent directors are appointed to maintain high standards of governance in organizations, it must be understood by promoters that their role is way beyond than merely becoming a watchdog and raising red flags. A proactive character trait to bring in and introduce innovative change in the company culture is something that promoters should consider while onboarding independent directors.Aforementioned are some points that could help promoters and companies realise the worth of need of independent directors and how fairly companies can appoint independent directors for stakeholders’ interest.

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