Why the massive demand for Independent Directors today?
The role of an Independent Director (ID) did not hold much significance for a long while. They mainly were appointed to fill the designation, and the appointing process was far from transparent. In a country like India, where families run large corporations, the post of Independent Director was filled by someone related to the Manger or chairman. However, all of these changed when The Companies Act, 2013 was enforced, and all the corporates were forced to comply. The boards were now supposed to hire non-executive directors, otherwise known as Independent Directors, only if they had passed the online assessment exam. It tests their corporate literacy, knowledge of Indian Company law, ethics, market norms, etc.
Moreover, the Act also put five years on the Independent Director’s term. They can be reappointed only after the company passes a special resolution. It wouldn’t be an exaggeration to call the Act a game-changer in corporate governance. Several positions of IDs soon became vacant as they were incompetent to the new terms.
Across the country, there is a growing emphasis on the need to hire Independent Directors. Executives from big corporations have revealed that they have recruited search experts who would bring qualified personals for the designation. So what exactly fuelled this new quest for Independent Directors? Although the Securities and Exchange Board of India (SEBI) guidelines are one factor, several other factors compel companies to look for expert directors to be hired onboard.
To begin with, there is an increasing awareness of corporate misconduct and fraud practices in Corporate Governance, especially after the Satyam scandal in 2009. Both domestic and foreign investors are conscious of the regulatory rules and are increasingly looking for companies that have better corporate governance. IDs are non-executive board members who do not have a personal incentive in the company. Unlike other executive positions where the managers try to maximize their profit, IDs are expected to remain neutral and keep the company’s best interest in mind. They act like corporate watchdogs who would point out the corporate misconduct and malpractices. They are also expected to make room for quality debates regarding the company’s decisions and add value to it. Since they are not closely tied to the investors or board members (after the execution of the Companies Act 2013), they are expected to take decisions impartially and in an objective manner. This, in turn, would benefit the minority shareholders.
Another significant role Independent Directors play is when it comes to conflict resolution. Board rooms can be a difficult place where conflicting opinions are raised. These independent directors can use their position to neutralize the situation and bring resolution. Most of the time, Independent directors are those people who have had considerable expertise in the field as executive board members of other companies or managers. Their years of experience can be beneficial for the company. Moreover, IDs can expand the company’s networking ability and resources. They can bring additional special advisors such as lawyers, bankers and financial experts.
Since the implementation of the Companies Act of 2013, there has been a massive demand for Independent Directors. Talent search consultants have agreed that they are asked to look for qualified Independent Directors in recent years more than ever. This is primarily because the role of IDs is now considered to be highly responsible. They are made accountable for any corporate malpractice that might occur. Since the pandemic happened, several companies have partially or completely shifted their work mode online. This has doubled the chances for new and sophisticated ways of financial fraud and misconduct. An Independent Director is expected to be aware of the possibilities of such practices and resolve or mitigate them. Along with these elements, the talent crunch also contributes to the shortage of Independent Directors. The proficiency test also requires vast knowledge and a comprehensive understanding of corporate laws and regulations.
This is where the Independent Directors' Institute (IDI) comes in. Acknowledging the need and propensity for well-equipped and qualified Independent Directors, IDI has developed a certification programme that enables you to be the change that the Indian corporate space desperately requires right now.
The tides are changing. Companies can no longer hire Independent Directors considering their personal connections or interest. Earlier it was restricted to a set of people that the chairman knew and decided. The newfound inclination towards hiring qualified and capability matching Independent directors has a lot to do with companies trying to be global and need experts on board. In conclusion, the demand for independent directors is a clear sign that the corporate governance is becoming efficient and board members are committed to the norms and regulations of the government. There are numerous opportunities available, and IDI could be a stepping stone to any one of them.
