1. Satyam Case: Years ago, B. Ramalinga Raju committed Rs.7,000 crore fraud on its balance sheet, which was the largest accounting fraud in history of corporate India. It laid many alarming truths about inadequacies of Country’s corporate governance standards. Despite Satyam being crowned India’s IT jewel and won numerous corporate awards and coveted with prestigious Golden Peacock Award for global excellence in corporate accounting and the Country’s fourth-largest company with high profile customers, it has embroiled in nation’s biggest scam within months of winning the award. The scam brought in light multiple flaws in corporate governance practices-unethical conduct, fraudulent accounting, dubious role of auditors, ineffective board, failure of independent directors and non-disclosure of pledged shares.
INDEPENDENT DIRECTOR AND THE COMPANY PERFORMANCE
The Board has two types of directors namely executive and non-executive. The Executive directors are responsible for the day-to-day management of the company and have the direct responsibility for the aspects such as finance and marketing. They formulate and implement the corporate strategy. They are specialized, expertise and wealth of knowledge that they bring to the business. They are full – time employees of the company and should have defined roles and responsibilities. Executive directors being the subordinates have no authority and power to monitor the CEO. To have a mechanism is important to monitor the actions of the CEO and the executive director to ensure that they pursue shareholder interest. For effective monitoring the non-executive directors need to be independent of the executive director and may be perceived as less than wholly independent.
The CEO is the full time post and has the responsibility for day-to-day running of the company obliging implementing the strategy and is responsible for the company’s performance. The post of the chairman is a part-rime and its main responsibility is to ensure that the board works effectively. His role is to monitor and evaluate the performance of the executive directors involving the CEO. The chairman has the responsibility for looking after the board room affairs and ensuring that the non-executive directors have the relevant information for the board meetings. Independent non-executive directors are likely to provide sound opinions on proposals and to become more effective decision monitors and likely to promote the interest of the shareholder.
CLAUSE 49 AND INDEPENDENT DIRECTORS
Boards of listed companies are required to have both executive and non-executive directors, with at least half of the board comprising of nonexecutive directors. In cases where the chairman of the company holds an executive position in the company, and at least one half of the board should consist of independent directors. Where the chairman is in a non-executive capacity, at least one third of the board should consist of independent directors. This condition was inserted because it was necessary due to then prevailing practice. In family-owned companies, the head of the family would be the non-executive chairman, while the day to- day management was carried out by persons from the subsequent generations. With this amendment to Clause 49, the chairmen are required to be truly independent to justify the composition of the board with one-third being independent.1
RESPONSIBILITIES AND DUTIES
An Independent Director acts as a guide for the company and is highly experienced. They play an important role in a company: improving corporate credibility and governance standards, acts as a watchdog, play a vital role in risk management. Independent Director also plays an important role in various committees which are set up by a company for good governance. Listed companies are required to set up audit committees of minimum three directors out of which two-thirds should be Independent Directors.
1. The information about disclosure of General Notice of directorship, membership of body corporate and other entities shall be furnished in the prescribed form to the company.
2. He should also inform the company about any change in the details submitted subsequently.
3. He has fiduciary duty to act in good faith and in the interest of the company.
4. He is under obligation to acquire proper understanding of the business of the company.
5. He should act only within the powers laid down by the Memorandum of Association and Articles of Association and by applicable law.
STATUS OF INDEPENDENT DIRECTORS
The managing director or chairman of the board has the power to take decisions. An independent director adds value to the hoard process with his expertise and strategic business insights. The importance has also been given to the independent director by the regulator. The audit committee and remuneration committee consists of independent director as chairman. Independent director needs to resign when companies are not willing to address the concerns raised by shareholders and should also help the board in this regard. Independent directors are being considered as a peer group to control the management and changes are recommended to enable them to play a dominant role. Board reforms are being taken place in the fast pace in that direction.
LIMITATIONS OF INDEPENDENT DIRECTORS
The major limitations of the role and functions of independent directors arise on account of two sources: an internal source i.e. personality factors of an individual director and the external source i.e. ownership of a firm, board composition and structure, board strategies among others. The mere presence of independent directors on a company’s board is not enough but the value they add to the board process ensure effective corporate governance.
1 “Corporate Governance-Global Concepts and Practices”, by Dr. S. Singh, First Edition, 2005, p.185, New Delhi, India