“Measure directors are defined and mentioned in Section

“Measure of a man is what
he does with power.”

-Plato

The above statement by
the great thinker Plato, is very applicable to the office of independent
directors. As this office is one where we see that the only major constraint or
restriction is that of the independent director, himself or herself not being vigilant
and not exercising the powers vested in them for the reason the company had
given them the office in the first place. The Act of 1956 really had nothing
much to say about independent directors other than making them mandatory for
registered companies, but the Act of 2013 has a lot more to say on this front1.
Independent directors are defined and mentioned in Section 149(6) and therefore
it is safe to say that their importance has been realized by law2. The
independent directors serve the basic role of balancing interests and uphold
corporate standards of their respective company3. An
independent director is a non-executive director, who has no relations with the
company that may inculcate any sort of bias whatsoever in his or her
relationship with the company.4 Even
in the NASDAQ rules, an independent director has been amply recognized and also
been given a clear definition as well5. Therefore
one thing can be said with a certainty that the office of an independent
director is one which has been recognized and given due importance over time.
The question which the researcher shall attempt to answer during the course of
this paper is why. Why the office of an independent director is an important
one and what are the functions it serves. As already established it is a
non-executive office, borne out of morality and ethics, keeping the interests
of the company and not the individual wants of the executive directors in mind.
The entire procedure as to how an independent director itself gives the
observer an idea of the independence of the person6.
Under the Companies Act, 2013, strict eligibility criteria have been laid down
for the appointment of independent directors. Some of which  are that an independent director should not
be related to the company or hold major stakes in it. He or she should also not
be related to any associate or subsidiary company. Neither should his or her
relatives have any pecuniary relationship with an associate or subsidiary
company. He or she also have to declare to the board that they are independent
at the time of their appointment and also notify the board at a time when that
status of independence is altered by factors both internal or external7.
Moreover, an independent director is not allowed to have any sort of stock
option or remuneration except for a sitting fee or any profit commission as
approved by the members of the company. The term of office of an independent
director is 5 years, he or she may also be reappointed by passing a special
resolution to the same effect.

Section 150 of the
Companies Act, 2013 has laid down the manner and procedure of the appointment
of an independent director and thereby settled the matter in the eyes of the
positivists8.
The office of an independent director is one wherein he or she has to balance
the interests of the company against the individual aspirations of the
executive directors. This is a simple case of vigilance within the company.
Every independent director is recognized today to have a very significant role
which is pretty exhaustively described in schedule IV of the Act9.
He or she is tasked with protecting the interests of the shareholders and also
to harmonize the frictions between the interests of the stakeholders, and also
to mediate between the shareholder and the management. “A board is only as good
as its independent directors.”10
This is true especially for companies whose transactions affect the economy of
India herself and by extension, even the world. As part of the company, the
independent directors have certain obligations arising out of the dutiful
completion of their respective responsibilities. Foremost amongst them is the
practice to be continuously updated with the affairs of the company and also
acting in guarding the interests of the company itself. A section11
of the 2013 legislation, makes it mandatory for there to be one independent
director in the social responsibility committee of the company. There are
different facets of a company which now mandatorily require to have an
independent director present in them. The part of the independent directors
role, which is by definition likewise a non-official executive, is not exactly
as expressed, and to propose a general statement would not be specific and generalisation
would be incorrect. What, in any case, is clear is that non-official executives
are not occupied with and not anticipated that would be occupied with the
everyday administration of the organization. Rather, they are required to be
careful gatekeepers of the exercises of the board all in all12.

The most critical quality
of a vigilance Board is to give guidance to the organization. In a
professionally managed organization in which no individual or gathering holds
huge voting rights, the methodologies are planned by the CEO. A business has
numerous partner groups, whose interests are affected by procedures, approaches
and operations of the business partner groups which have low interest level and
high power ought to be kept fulfilled to keep away from them picking up interest
and turning into an member of a group, which has abnormal level of interest and
high level of influence. Supervisors guarantee cooperation by partner groups,
which have high interest level and high power, since they are significant
drivers of the change and real rivals of methodologies. Indian corporates do
take after a similar practice. As the economies decreased and proprietorship
turned out to be more scattered and scattered. There was a progressive move in
control from direct proprietors under the control of Board. The capital
suppliers, thought generators and administrators framed unmistakable groupings.
The creation, support and dispersion of riches are taken care of by one gathering
while the arrangement of capital is finished by another gathering. The
organizations need to create surplus for manageability and development and to
guarantee sufficient profit for funding to hold the current shareholders and to
draw in the potential financial specialists of other partner bunches. This
approach prompts to overlooking the enthusiasm of those gatherings, which have
low power, regardless of the possibility that their advantages are affected
essentially by techniques, strategies and operation of the organization
Managers are remunerated for controlling the partners and not for adjusting and
securing interests of different partner bunches or for settling worries of
different partner assembles in simply, reasonable and impartial way. As needs
be, the essential role of Independent Directors is to secure the interests of
non-controlling shareholders. In the changing business environment a new visage
of corporate administration is developing13. In
the extent of corporate governance model, the primary role of Independent
Directors is to protect the interest of the non-controlling shareholders. In
the new paradigm, Independent Directors are expected to take two additional
responsibilities. They have to ensure that the executive management is making serious
endeavors to meet the social expectations and to act as an arbitrator in a
dispute between stakeholder groups. In the present formulation Independent
Directors might not be able to discharge their existing and additional
responsibilities effectively14.
This is majorly due to the fact that the main source of information to put the
executive directors under the scanner are the executive directors themselves.
This gives rise to a fallacy in the mechanism, as how is the system supposed to
be efficient when the subject of the inquiry itself is the source of
information for the inquiry.

 

The
new concept of having Independent Directors is a welcome step for corporate
governance in India. The Act of 201315
has conferred greater empowerment upon Independent Directors to ensure that the
management & affairs of a company is being run fairly and smoothly. But, at
the same time, greater accountability has also been placed upon them. The
Companies Act, 2013 empowers them to have a definite ‘say’ in the management of
a company, which would thereby immensely strengthen the corporate governance
systems which prevail in India. However it is also important to keep in mind
that good corporate governance is not just the outcome of appropriate selection
and effective functioning of thee independent directors. Every director,
whether independent or non-independent, executive/non-executive has a distinct
role in the functioning of the company. It is only when the entire board
functions effectively which results in good corporate governance and benefit
minority as well as majority shareholder in its long term which maintains a
good corporate image in the market. Moreover, it is not just about images it is
also about ethics and the proper functioning of a conglomerate. A very important
case to cite in this regard would be the highly infamous Satyam scam. It was a
respected company and its entire standing in the eyes of the people fell and
the independent directors themselves were contended to be guilty by many people16.
Such is the tricky path the independent directors walk to guard the core
interests of the company at heart. If they are not vigilant enough and the
executive directors try and misuse their positions many a times, the
independent directors are also blamed without any criminal intentions on their
part. The Satyam scam is burning example of such a scenario. There are
conflicting takes as to if we consider independent directors to be “policemen
of the boardroom”, then it will seriously curtail the freedom of the board and
the executive directors. In the humble opinion of the researcher it is a
question of integrity as when one is working for a company, then he or she is
expected to know and respect the fact that their actions from offices of
responsibility such as an executive director, has consequences and therefore
must be tempered. The Naresh Chandra Committee while expressing its view on the
role of directors said, “at the core of corporate governance is the Board of
Directors. Directors are fiduciaries of shareholders and not of the management.
This does not imply that the Board must have an adversarial relationship with
the management, but where the objectives of management differ from those of shareholders,
the non-executive directors on the Board must be able to speak in the interest
of the ultimate owners, and discharge their fiduciary oversight functions. This
is why ‘independence’ has become such a critical issue in determining the
composition of any Board. Clearly, a Board packed with executive directors, or
friends of the promoter or of the CEO, can hardly be expected to exercise independent
oversight judgment.”17
Such is the potential miasma which the independent directors have a risk of
falling into. This is the very crux of the issue here, in the humble opinion of
the researcher and therefore must be looked into, the greater the involvement
of the independent director, the lesser freedom, so to say of the executive
directors of the board of the company. There is a very fine line between these
guardians of righteousness becoming impediments for the free functioning of the
company. It is here where we face a dilemma and which must be solved for the
idea of an independent director is very healthy but it must not be misused
either. Such concepts of company law make these corporate endeavours a
double-edged sword. Indian corporate governance regulations, in respect of board
structure and processes, have been found wanting in addressing issue arising
from the presence of dominating shareholders in Indian organizations and the
new set of regulations are very welcome in bringing about the much required
solution to India’s corporate governance woes. The mandatory requirement for
constituting a nominations and appointments committee of the board, with a
majority of independent directors, has certainly brought about the much needed transparency
and objectivity in the directors selection process. However this may not be
enough and there is, probably, a need to look at incorporating stronger
mechanism in the statute for the independent director appointment process. Moreover,
in the humble opinion of the researcher, it is a very important position and
has great repercussions in the corporate world. A steadfast and fair
independent director who respects the freedom of the board, whilst also
maintaining a clear stance as to his or her allegiance to the company in the
greater scheme of things seems to be the most efficient way for a corporate to
utilize the powers and functions of the independent directors at large. For
there is no point in having no checks at all on the board, yet those checks
should not become invasive and thereby a hindrance. It’s a fickle situation
which is dynamic and must be controlled and that control will only come in the
form of the union of wills of the respective independent directors as well as
the executive directors of the company. It is a simple enough concept, yet
actually manifesting it in life is going to be very difficult and its an
on-going process as the people involved must be strong willed and understanding
at the same time. The concept of independent directors should pivot on the
perpetuity of companies, the concept that the directors do change but the
company lives on forever, Therefore a structure is needed that further polishes
what already exists in the form of the Companies Act, 2013. It is here that the
researcher would like to conclude. On the idea that there shall always be the
company s we need a future-proof mechanism to insure that the role of
independent directors does not encroach upon the jurisdiction of the executive
directors while it also maintains the direction of the company in a manner that
the company itself does not suffer under the whims of the executive directors
without proper consequences.

1 Yogesh
Malhan, India: Independent Directors-Under The Companies Act, 2013, Mondaq,
Available at: http://www.mondaq.com/india/x/295386/Contract+Law/Independent+Directors+Under+The+Companies+Act+2013
(last visited: 12th January, 2017).

2 Companies
Act, 2013.

3 Who are Independent Directors and
what role they play, The Economic Times, Corporate & Industry, Available
at: http://economictimes.indiatimes.com/slideshows/corporate-industry/who-are-independent-directors-and-what-role-they-play/slideshow/17853907.cms (last visited: 12th
January, 2017).

4 Ibid.

5
NASDAQ Marketplace Rule 4200(a)(15), Available at: http://media.corporate-ir.net/media_files/irol/87/87823/corpgov/NASDAQ_Marketplace_Rule_4200.pdf
(last visited: 12th January, 2016.

6
Supra at note 3.

7
Ibid.

8
Supra at note 1.

9
Supra at note 2.

10
R. Sukumar, How Independent
Are Independent Directors?, Livemint, Available at: http://www.livemint.com/Opinion/ZVZpJgwUI6JBJciOldX4kI/How-independent-are-independent-directors.html (last Visited: 12th
January, 2017).

11
Section 135(1) of Companies
Act, 2013.

12
Singapore Institute of
Directors, Available at: http://www.sid.org.sg/main/good_practise_doc/good_practiceSGPNo72007 (last visited: 12th
January, 2017).

13
Global Reporting Initiative
Report, 2012.

14
Shriram Subramanian, Business Standard, Pressreader, Available at: https://www.pressreader.com/ (last
visited: 12th January, 2017).

15
Supra at note 2.

16
Ashish K. Bhattacharyya,
Business Standard, Satyam: How guilty are the independent directors?, Available
at: http://www.business-standard.com/article/economy-policy/satyam-how-guilty-are-the-independent-directors-109011201009_1.html (last visited: 12th
January, 2017).

17
The Institute of Company Secretaries in India (2007), Corporate Governance
(Modules of Best Practices), 6th (Revised) Edn, New Delhi, Taxmann
Publications (P.) Ltd, p.127.