The Companies Act 2013 and Sebi's Listing Obligations and Disclosure Requirements in India require listed companies to establish balanced boards with an adequate representation of Independent Directors. This requirement's overarching goal is to strengthen the internal control mechanism and foster greater trust between the company and its stakeholders.
It is critical to foster greater trust between the company and its stakeholders in order to ensure the organization's credibility. Having such credentials affects not only shareholder value and prices, but also the buy-in that organisations have in society for carrying out their day-to-day operations. When we think of reputed companies, we must accept that they have achieved this status as a result of their integrity and commitment to excellence in corporate governance. And so, the role of Independent Directors is critical as an important stakeholder in the organisation. An Independent Director will be critical in ensuring the organization's credibility.
An Independent Director is expected to provide the governance model with leadership, vision, status, and credibility. Independent Directors are chosen to provide specialised knowledge, board diversity, and independent appraisal. This invariably implies that they represent the company's public face. As a result, when selecting Independent directors, corporations must ensure that the emphasis is not only on their skill sets and experience, and their ability to perform the role that is expected of them, but also on demonstrating to the public that they are people of integrity and repute.
The company's Independent Directors serve as advisors. Their responsibilities include, in general, improving corporate credibility and governance standards by acting as a watchdog and playing a key role in risk management. In addition, Independent Directors actively participate in various committees established by the company to ensure good governance.
Independent Directors should make up at least two-thirds of audit committee directors in publicly traded companies to oversee the financial reporting process and disclosure of the company's financial information, ensure compliance with listing and other legal requirements, disclose related party transactions, and qualify the draught audit report, among other things.
The influence of corporate insiders in the appointment and removal of Independent Directors is a key factor that has a negative impact on corporate culture. This undermines the credibility of these directors in protecting outside investors from insider opportunism. Allowing shareholders to vote on the appointment and removal of Independent Directors may boost independent directors' credibility in companies with dispersed ownership structures. As a result, while retaining the controller's ability to appoint the majority of the board, a system for the appointment and removal of Independent Directors that provides greater confidence and protection to minority investors while also promoting other benefits for the boardroom decision-making process is ideal.
In order to carry out their duties effectively, Independent Directors must be able to exercise strong oversight over the company's actions. Over time, regulations have tightened the definition of independent directors, recognising this fact and providing them with additional powers when scrutinising related party transactions, executive compensation, and subsidiary financial statements. Their critical role in preserving corporate credibility, on the other hand, exempts them from liability for any acts of commission or omission that occurred without their knowledge.
Now let us look at the case study of Infosys. Infosys, which has long been regarded as the gold standard for good corporate governance practises in India, has seen its board come under fire. The promoters, led by co-founder N R Narayana Murthy, have accused the board of being opaque and have sought its reconstitution. Aside from Chairman R Seshasayee, Infosys' 10-member board includes seven independent directors.
The Independent Directors have largely remained silent, with no separate comments on the ongoing issues. Experts believe that such events have an impact on public perception of the institution of Independent Directors and raise concerns that other companies may face similar pressures in the boardroom to compromise on high governance standards.
As a result, it is clear that we require Independent Directors who can enhance our organisations' reputation and credibility. The worth of such goodwill and credibility cannot be overstated. If you are well-known in your circles as someone with impeccable credibility and believe you can lend your repute to large organisations, there is definitely merit in becoming certified as an Independent Director. This will enable you to take on this exemplary role and contribute to the transformation of the corporate governance ecosystem. Join the Independent Directors' Institute to become certified and learn more about what this role entails and how to practise good corporate governance. Register using the link provided below.