Are Independent Director’s required on the Board?
07 Oct 2021
To understand the eligibility criteria of an Independent Director, one must read sec 149 of the Companies Act, 2013. Furthermore, we can understand the various roles of an independent director in a listed company from SEBI (LODR) Regulations, 2015. The concept of Independent Directors emerged in India in the late ’90s. It was recommended by the Kumar Mangalam Birla Committee in clause 49 of the Listing Agreement. But who is an Independent Director (ID)? As per sec 149 of the Companies Act 2013, an Independent Director cannot be a promoter or related to promoter, but this looks good only on pages. As in reality, they are either a promoter’s Friend or their circle of influence or indirectly related to the promoter. Their status of independency is always questioned. Why do promoters of the Company require Independent Directors? Merely, to act as a watchdog? In India, we have witnessed challenges in their independent functioning through numerous scams and scandals of big corporates. The best example is that of Satyam Scam. If promoters do not require IDs to be merely watchdogs, then whom do they require them for ?Can we imagine replacing the role of Independent Directors on the Board? - Dipti Mehta, FCS, LLB, Insolvency Professional Foundation Certificate of International Insolvency Law (INSOL) Member of International Women’s Insolvency & Restructuring Confederation mentioned: “IDs are not watchdog as such. The provision of the Companies Act is always a point of the matter. Instead of Mentor, the act intends to have a multi-disciplinary, expert knowledge on the Board who is the Trustee of the Shareholders. So initially the Act did not mention what kind of experience or knowledge is expected out of IDs, that freedom was reposed on the Board and the shareholders. But since the Companies were not doing that properly, there came out the first concept of Independent Directors. It is to ensure the protection of Interest. There should be independency. If we view Independent Director as a Watchdog then it will not work. We cannot say that promoters are always bad. We have to respect the promoters as they are the creators of that Company. The provisions of the law are machinery to observe their Act. In view, there can be an intention on the part of the promoters or other Directors also, to get attracted to other returns and they may be lenient in the compliance of the law. Independent directors should ensure the compliance of the law in the spirit and the good. The act always intended guidance, neutral thinking, outside view, representing the public from the very beginning. The process can be set up by having Independent Director as an Instrument. Independent Directors are not defective agents/investigating agency.”“Answering your question I would say that independent directors are required on the board. Businesses in India are largely promoter-driven, family-driven businesses where independent, neutral, unbiased, insights into the board working are required. Also at times, the focus of promoters could drift to only shareholder's interest. But independent directors help to look at stakeholder's interests as well. So on a larger platform if you look at it then independent director's role becomes important that they provide insights, they are there to see compliance and governances as required by the legal authorities.”Yes, these independent directors must transition their role from being watchdogs to being the Mentors, guide to the organisation and the boards. This transition from the existing role to that of a mentor would benefit the company to a greater extend. Why do Indian Companies consider it imperative to have independent directors on the Board of the Company? Predominantly, the law requires certain companies to have Independent Directors on the Board. In addition to this, the Companies Act through one of its amendments had introduced the concept of Independent Women Directors. Perhaps, being the Token Women on board brings in a lot of responsibility, but some organisations treat this as a tedious requirement of law to be complied with.The key to strike a balance between such independent functioning and expertise is either hiring individuals backed with good education/experience in a particular industry or multiple industries or imparting training to such directors by a set of mentors.Mentors/advisory companies are a network of people with good exposure in different fields and ready to impart their knowledge and experience to the Board. The promoters do not require only a watchdog; they rather require somebody who can mentor/ guide the Company in setting strong governance practices at the top of the organisation, i.e. at the Board level. Undoubtedly, every director at some stage of his directorship must have undergone mentoring on grooming, leadership skills, etc. But is that sufficient to navigate a company to reach the top? The involvement of mentors on the board can bring expert solutions to the operation of the Company.Also the Question comes is Whether Such ID require any sort of mentoring? Are they equipped to handle such diverse, demanding and challenging role when they are busy with their own engagements? Dr.Mita Dixit, Director & Family Business Advisor (FFI-USA) Independent Director, Co-author of “The 5Gs of Family Business” mentioned: “Yes, I would say that this entire role of independent directors and especially in India the corporate governance is recent or rather not a too old concept. Boards have always played an integral part in the decision-making process. But the governance got its prominence in the past 15 years or so. For Independent directors, there hardly any formal/courses available for training. The characteristics of an independent director are to have a neutral and independent mindset and also workable knowledge about the statutory norms, legal norms, and governance or compliance norms. Besides, a sense of understanding the business of the companies on which they are on the board. So, independent directors require mentoring and coaching to develop some qualities and certain skills. MentorMyBoard (MMB) and some other organisations are platforms where the independent directors groom themselves for that role. It is important and it is required in a big way rather.”As the Companies Act, 2013 and other SEBI regulations become more and more draconian with time; there is a lot of expectation from the Board of Directors on the part of Governance, Compliances, and running the business efficiently, also during such unprecedented times. Therefore, the role of an Independent Director surely needs a change in the mindset with the wide spectrum of role they play today. It is not restricted to just act as a watchdog, but help navigate the Company to achieve its goals/objectives. To conclude, Promoters do not just require an Independent Director to act as a watchdog or a guard. Perhaps, an Independent Director who can guide the Board, bring in expert solutions, and help companies with quick, balanced decision making at the Board level which will ease out, expedite and smoothen operations of the Company. And to meet these growing demands of Corporates, regulators and promoters, Independent Directors who take up these roles also need continuous up-skilling, learning, remaining abreast with regulatory changes and getting mentored to be effective in their roles. If you are ID or you are aspiring to be an ID, what are your thoughts on this? Will your role be of watchdog for the company? Or will your role be that of Mentor to the Company? And most important -Are you ready?