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  • Subject area(s): Marketing
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  • Published on: 14th September 2019
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  • Number of pages: 2

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INTRODUCTION

The concept of Independent Directors have gained a world wide impulse in the wake of

Corporate Governance in recent years with the occurrence of various corporate failures such as

Satyam debacle, Enron Debacle and several other scandals. Corporate Experts have always felt

the importance for directors to be independent and free from the leverage of the board. The

demand made by experts was applicable because directors are appointed by the board itself

which in turn is directed by the Chief Executive officer who also happens to be the Chairman of

the Board. In reality when there is a requirement for approval of Directors in many companies,

they do not have any say in it. But regrettably the legislators in several countries have

understood the importance of independent directors only after the occurrence of various scams

that provoked the world economy. It is often discovered that the existence of Independent

Directors have bombarded as an effective discouragement against fraud, inefficient use of

resources, mismanagement, inequality, irresponsibility of decisions and as a indicator for striking

the right balance between individual, economic and social interests.

ROLE OF INDEPENDENT DIRECTORS

Independent Directors have a main role in the entire compound of corporate governance. It is

rapidly being observed that independent directors occupy a crucial position with respect to the

growth of the company. In fact Independent directors are reviewed as both a protection and a

important source of competitive benefit.

Neither the listing Agreement nor the 1956 act prescribes the extent of duties of Independent

Directors vis-a-vis the executive directors,the shareholders, or the promoters, minority or

otherwise. Independent Directors may be looked as archives of alertness intended to ensure that

the executive directors and the promoters carry on the movement of the company in allegiance

with the concern of the shareholder as a whole. Preferably, independent directors could be

considered as critical to maximizing revenue, strategic advisers to the board and overall value of

the company.

The new act consist of guide to professional tactics for independent directors which shapes the

role of independent directors by designating facilitative roles, including offering independent call

on issues of strategy, performance and key appointments, and taking an impartial view on

performance evaluation of the board. Independent directors are also required to fulfill themselves

on the honesty of financial information to balance the varying interest of all stakeholders and

particular to protect the rights of the minority shareholder.

NEED FOR INDEPENDENT DIRECTORS

After the Satyam Debacle in the year 2009, the need for independent directors was badly felt by

the Indian Legislators and the Corporate experts. M/S Satyam Computer Services Ltd rooted

loss to the investors to the tune of Rs 14162 crores and perhaps became the largest fraud case.

Company head Ramalinga Raju and members of his family secured illegal profits to the tune of

Rs 2743 crores by various tricks. The fraud was carried out by boosting the revenue of the

company through false sales invoices and showing corresponding gains by forging the bank

statements with the connivance of the Lawful and Internal Auditors.

The annual financial statements of the company with inflated revenue were displayed for many

years and this led to the advanced price of the scrip in the market. Innocent investors were lured

to invest in the company in this process. Pursuits were made to conceal the fraud by achieving

the companies of kith and kin. In order to protect the interest of the investors especially the

minority shareholders and to avoid such scams in the future, the concept of Independent

Directors emerged.

The Company Act, 2013 was depicted with a vision to improve the standards of Corporate

Governance and ensure transparency to the minority shareholders. The new act includes

provisions connecting to Independent Directors. Sections 149(6) of the Act defines Independent

Directors. Section 150 deals with the manner of selection of Independent Directors. Section

149(12) speaks about the liability of Independent Directors. Schedule IV of the said act sets

down a code for Independent Directors.

The existence of Independent directors on the Board of a company would reform corporate

governance, particularly for public companies or companies with a significant public interest. It

was felt by the Corporate Experts that Independent directors would be able to get an element of

objectivity to the Board process in the general interest of the company and thereby to an

advantage of minority interests and small shareholders. Eventually corporate experts realized that

the inclusion of independent directors will bring a different point of view, a more professional

vision and a more knowledgeable aspect.

CONCLUSION

The Satyam affairs and other scandals abroad brought to light the growing need to ascertain

accurately the standards for inducing the liability of independent directors for prevention and

detection of fraud, in view of the limited roles be engaged in by them in the company. These

scandals taught the corporate experts and legislators in India and abroad a costly lesson which

drove them to take sufficing corrective measures

As regards India, the legislators after such failure enacted a new act which makes a considerable

aim to bring the role of independent director in line with altering needs of the company. The

main objective behind the new acts’s provision on independent directors is to assure transparency

and independence and at the same time to bring value to the company by sustaining input on

marketing, strategy, compliance, business and other issues including performance of monitoring

functions.

A company is only considered to be efficient and trustworthy if it has a good corporate

governance. Active participation of independent directors and group members contributes a great

deal towards ensuring conviction in the market. Corporate governance is also important for

foreign investors to make a call on which companies to invest in. It gives an optimistic impact on

the share price of the company. If a company has a clean image on the basis of corporate

governance, it is beneficial for companies to source capital at more adequate costs. Corporate

governance should not become the main attraction only after the exposure of large scam.

http://www.indianacademylaw.com/role-of-independent-directors-in-corporate-governance/

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