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.
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