The Role of the Independent Directors

With the explosion of scandals pertaining to corporates due to mismanagement and fraud in recent years, the regulators all over the world have been implementing a series of policies aimed at improving corporate governance and ensuring that companies follow ethical and normative rules of business. A part of this initiative has been to goad the companies to nominate a certain percentage of their board to persons who are not affiliated to the company. These are the so-called independent directors who sit on the boards of companies in a purely professional manner without having a hand in the day to day running or other activities of the company.

The point about the independent directors is that they are drawn from a pool of professional who have had wide industry experience and are qualified to sit on the boards of the companies. What makes this process appealing to the regulators is that these independent directors can bring the much needed perspective that is objective and balanced since they are not connected to the company nor its management and hence do not have hidden agendas.

In India, SEBI and the Corporate Affairs Ministry have decreed that between 10-15 percent of the composition of the board must be made up of independent directors. This move is aimed to bring in more objectivity to the art of corporate governance and introduce transparency and accountability from the directors who are drawn from the ranks of the management. This rule has been enforced given the spate of corporate scandals like Satyam where the top management itself indulged in fraud and dubious business practices. So, the line of thinking goes that bringing in independent directors would usher in greater oversight over the functioning of these companies. Since the Satyam Scandal was because of the board looking the other way when its founder was indulging in defrauding the company, the Ministry of Corporate Affairs is implementing this rule to introduce greater oversight.

In the US, independent directors have been known to bring in a fresh perspective as well as check the runaway business behavior dictated by profits and personal benefit. In many companies in the US, the independent directors are the ones who often thwart the management from taking decisions that are based on personal benefit as opposed to the interests of the shareholders. Further, independent directors are tasked with investigating cases of corporate malfeasance and unethical behavior because of their supposed objectivity. However, there have been instances where the independent directors themselves acquiesced in the wrongdoings of the companies and their boards. The solution to this has been the initiative to make the independent directors responsible for the actions of the board so that they have a stake in ensuring that the board does not tread on the wrong side.

Finally, independent directors also bring in the much needed professional expertise since they are individuals with wide experience in running companies as well as the fact that they sit on the boards of other companies which means that they are abreast of the latest happenings. There has been a move by the regulators in many countries to ensure that independent directors do not have conflicts of interest and these have been codified into rules governing how many companies they can associate themselves with and the sectors and industries that they represent.