Article (January-2019)


Independent director - Moving on a tight rope

Dr. Saagarika Ghoshal

Designation : -   Managing Director

Organization : -  Match Board (Business transformation and Board Practices)


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I get innumerous requests to know more about how to be an Independent Director? I wish I had a formulae or a medicine prescribe! Unfortunately there still isn't a straight-cut route. So for those who are interested to put in place a portfolio of career activity such as board appointments really do not have an access to clear information on how to be an ID and the vacancies. In fact there aren't many apparent appointments. Many a times these appointments are either limited to the high profiles (Trophy appointment) or for family and friends. On the other hand in today's business scenario there is surely a dire need of next generation talent to disrupt status quo in the boardrooms. As our business world changes quickly and remarkably, the subjectivity and nuances of business lingo remains the same and given that scenario corporate governance in the boardroom is in stratospheric league of its own. While destination boardroom has been a mantra for many new aspirants, it is not merely a designation or ornamental position. Independent directors now-a-days are considered pioneers of good corporate governance within an organization. They safeguard the rights of minority stakeholders along with keeping intact the financial interests of an organization. The increasing stake of an independent director by a firm depicts the verdict of impartiality in front of its various stakeholders. Organizations are therefore willing to hire highly experienced non-executive directors who would not only scrutinize the decisions made by the board but also can resolve the conflicts between the shareholders and promoters and bring in the required balance. Positioning of ID is also telling the culture of inclusion of voices from outside to mainstream.
As an independent director one should implement his or her duties in an altruistic way to safeguard the goodwill of the company and should not indulge in any kind of material relationships with a member of the board which might influence his or her objectivity in strategic decision making while acceding or dissenting for any kind of decision. They should also avoid any step that could endanger the independence of his or her position. All the more important for an ID is to ask uncomfortable questions, seek elaborate information wherever required, raise concern about any suspicious activity, and seek an expert's opinion seating outside the company. In addition to this, it tells that an independent director should conduct frequent audits to ensure compliance checks on various processes and to curb any prospective risk. He or she should also notify concerns about prospective or actual fraud, unethical conduct, or violation of compliance in any form. Therefore, dynamics in board room and role of communication for an independent director is extremely crucial. Performance can never be improved with mere presentations of independent directors unless concerns raised by him or her are appropriately addressed by the board. Therefore, independent directors should play the role of a 'whistleblower' in order to ensure transparency in routine operations and to promote ethical business environment. In addition to this, an independent director should device innovative and critical ways to effectively implement compliance policies and norms. Government should also implement some regulations to induct independent directors within board of directors of every organisation to safeguard interests of every stakeholder and the goodwill of an organisation in the market. The specifications of Companies Act 2013 will only be considered complete then.
Turning the page…
It is worth keeping in mind that many professionals are interested in figuring out, who represents the board of directors like CEO, founder(s), big investors or venture investors, shareholder having a large number of shares of the company, and other senior executives before getting associated themselves. Such a case could be seen with an independent director, who is solely another entity from all the representatives of the board of directors. Having a non-executive director is one of the basic necessities for the big companies who are fully impartial with each and everyone involved in the company's matter. One of the reasons of involvement of independent directors in the companies is also to reduce the culture of partiality in the Company. Now the organizations are also willing to have a look at the determinant and capable employee along with giving input for resolving conflicts between shareholders and promoters. An independent director neither represents the team of board of directors nor any other functional body of a company, yet should have the capability to bring sheer balance to a board.
Who is an independent director?
As an ID the law of the land should be your Bible and this means that one should be absolutely in know of laws and compliance by heart and cautious of consequences. Incidentally there was no specific definition provided to the word independent director in The Companies Act, 1956. But the Independent director became the center of attraction as per The Companies Act, 2013. It has established separate criteria and forum for the companies to have an independent director for their company. More specifically, an independent director is a non-executive director of a company who helps in the improvement of governance standards and corporate credibility of the company. Further, an independent director doesn't have any type of relationship with the company that may affect the independent judgment of his/her made for the company. The designation 'independent director' is well-defined in the act, along with many new conditions and necessity relating to the requirements associated with their appointment, duties, and roles. Moreover, the involvement of an independent director made the decisions more effective and unbiased by managing prospective frauds, mismanagement, unethical utilization of resources, and non-accountability of poor financial decisions. The independence of board is increasing across the globe with the highest level of independence registered in the US(74%) and then in EU(34%). India therefore is lagging behind. Time to take a cue i guess.
Role of an independent director
An independent director plays a role of a mentor, guide, or a coach for the company. The role and responsibilities of an independent director include the functionality of governance standards and improving the corporate reliability by keeping eye on the company along with helping in managing risks. As an ID one does undertake the appropriate actions and regularly update and refresh the knowledge, skills, and familiarity with the company. It is really not a one off meeting relationship rather starts with attending the company's general meeting and committee meeting, and giving valuable feedback for the on-going agendas.
One has to be alert enough to always take the measurable steps to protect the legitimate interests of the company's employees and stakeholders. Hence immediate reporting to the unethical behavior, suspected or actual fraud, or any violation of the company's norms and regulations under the company's code of conduct is an unsaid rule. It also goes without saying not to disclose any confidential information including the technical, commercial, advertising and sales plans. During the conflict between the stakeholder's interest and the management, focus should be towards the solution which is in the interest of the company. Protecting the interest of all the stakeholders, especially concerning about minority shareholders is another objective including establishing the suitable level of pay-scale for the key managerial personnel, senior management and executive director of the company.
Three quick lessons
As a Board Member - you have to keep "your house" in order. Board is ultimately responsible for frauds, misleading and deceptive conduct, ethical practices and cultural issues.
With 20:20 hindsight, normally breaches are systematic and were left unchecked for years. End of the day the buck stops at the board and blame games on past just doesn't work and cannot save you a serious consequence. So it is better to get your 20:20 vision focused on the corporate governance and compliance.
Last but not the least culture comes from the top and the boards are responsible for guiding the ship and decide and recalibrate on business leadership as and when needed keeping in view the interest of the Company.
Who can be an independent director?
One of the most essential criteria is the specialized skill set you bring to table as an ideal independent director for the concerned business. Also one who can work with utmost integrity and take unbiased decisions. Furthermore, while taking the decisions he/she should thoroughly go through the situation and understand it, then finally conclude with the appropriate conclusion. He should be aware that the daily business activities of an organization cannot be supervised by an independent director. However, you can provide suggestions based on their checks and audits to augment considerations in the boardroom. Hence, each independent director should know the minutest details of the business in order to improve not only governance but also other business decisions in an organization. So in short the association with the organization is not only limited to board meetings but far deeper involvement and understanding is desirable...
It's time to take your seat
Unfortunately we really do not have structured board readiness program other than the board certification programs run by few credible organizations. Therefore, there is no step by step guide for an Individual professional to develop board portfolio for board appointments, unless of course the organization chooses you for a structured program to be groomed for board level positions. Hence it is all the more important to make your own strategy and seek help from mentors, guides or even friends. Basically it is important to get your networks work for you. Lastly as they say, it's always good to do your due diligence before taking a call on picking up an ID role.