independency of director -myths and realities

INDEPENDENCE OF DIRECTOR INDEPENDENCE OF DIRECTOR

Myth or Reality

Pavan Kumar Vijay

Concept of Independent DirectorConcept of Independent Director

Independent director means a director who is not connected or associated with the company in any manner and works only to safeguard the interest of members who individually cannot look after their interest.

GenesisGenesis

The concept of Independent director has been originated to drive the companies towards inculcating the concept of corporate governance in their management.

What is Corporate Governance???

Corporate Governance rests with the Vision and Perception of the Leadership

and

A Leader need to adopt a Vision for Corporate Governance

Corporate Governance FrameworkCorporate Governance Framework

Output – Input = Wealth Created ?

Sustainability

Happiness andProsperity of all

Stakeholders

Reinvestment

Distribu- tion

Research and DevelopmentHR DevelopmentInfrastructureRisk Management

SUPPLIERS Adequate ReturnsHUMAN ASSETS Adequate RemunerationCUSTOMERS Affordable PricesPUBLIC Payment of Taxes and Partnership in National Development Projects

Wealth Creation Wealth Management Wealth Sharing

EnhancedCapabilities

Best Management Practices are Vital Here Law and Ethics are Vital Here

Stakeholders in Value ChainStakeholders in Value Chain

SUPPLIERS CUSTOMERSHUMAN RESOURCE

Supply Funds, Materials and Services

Value Addition and Management of Resources

Give Opportunity to Co. to Satisfy their Needs

Adequate Returns for Funds, Material and Services Supplied

Adequate Salary and Security for leading a Happy Life

Best Quality Products and Customer Care at Minimum Prices

ROLE OF STAKEHOLDERS

EXPECTATIONS OF STAKEHOLDERS

Potential Suppliers, Human Resources and Customers

Biological, Economic and Cultural EnvironmentPUBLIC

PUBLIC EXPECTS PARTNERHIP FOR SUSTAINABLE DEVELOPMENT

Principles of Corporate ExcellencePrinciples of Corporate Excellence

Fairness to all stakeholders

Mutual Trust, Transparency and Togetherness

Unrestricted Communication and Continuous Feedback

Sharing Knowledge, Success Stories and Experience

Sharing Happiness and Concerns

Helping Each Other – Round the Clock

Infact, these principles are the foundation of

Best Governed Organisations

irrespective of their form and size

Advantages of applying Best Corporate Governance Practices

Growth

Growing Revenues

Growing Profits

Growing Market Value

Widespread Goodwill and Brand Reputation

Access to Global Markets

Better Access to Human Capital

Ready Market for New Products

Widening Customer Base

Enhanced Trust and Confidence of all

Stakeholders

EMPLOYEESEMPLOYEES

INVESTORSINVESTORS CUSTOMERSCUSTOMERS

SUPPLIERSSUPPLIERS

GOVERNMENT AND REGULATORS

GOVERNMENT AND REGULATORS

SOCIETYSOCIETY

Leading to…

Environment

Civil SocietyBusiness Society

SUSTAINABLEDEVELOPMENT

Commitment to well-being and progress of all stakeholders is our age old mantra

Satyam Vada Dharmam Chara

- Taittariya Upanishad

“Forever speak the truth and follow the

dharma”

Truth : Disclosure of Actual State of Affairs

(Transparency in operations and transactions)

Dharma : “Dharma is for the stability of

society, the maintenance of social order and the general well-being and progress of humankind.”

- Karna Parva of the Mahabharata. Verse-58 in Chapter 69

Governance Concept in ‘Ramayana’Governance Concept in ‘Ramayana’

To provide “the maximum happiness for the

maximum number of people for the maximum

period, based on the principles of Dharma –

righteousness and moral values.”

- Ayodhya Kand

“The Customer is King”

- Mahatma Gandhi

This is the soul behind modern

Marketing Management

Worshipping 33 Crore Godheadssignifying various species, plants,

cosmic elements, …

Care for Panchtatvas - Prithvi, Jal, Vaayu, Akaash and Agni that make a human

being

This is our approach to

Environment Protection

The four essential principles of Mahatma Gandhi's philosophy

Truth, Ahimsa, Trusteeship and Constructive Action

Corporates are also expected to use their

Capacity, Knowledge and Resources

Maximisation of stakeholders’ value and well-being and progress of humankind

TOWARDS

THROUGH

Transparency, accountability and truthful disclosure of state of affairs

Dharma

Truth

This is our own age old mantra of

Good Governance

Companies that have followed theseprinciples of

Corporate Governancehave

Consistently earned high returns, increased their net worth and

enhanced their shareholders wealth

Invested significantly in proactive research and development

Developed people into ‘achievers’ than just ‘performers’

Dealt ethically with customers, government and business partners

Maintained and updated their professional management culture, system and processes

..and accomplished

WINNINGEMPLOYEES

WINNINGEMPLOYEES

GROWINGINVESTORS

GROWINGINVESTORS

DELIGHTEDCUSTOMERS

DELIGHTEDCUSTOMERS

TRUSTEDSUPPLIERS

TRUSTEDSUPPLIERS

SATISFIEDGOVERNMENT AND

REGULATORS

SATISFIEDGOVERNMENT AND

REGULATORS

HAPPYSOCIETY

HAPPYSOCIETY

“ Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders.”

- The Institute of Companies Secretaries of India

Independent Director???

Definition of Independent Director – Clause 49 (1)(A)(iii) of Listing

Agreement

Definition of Independent Director – Clause 49 (1)(A)(iii) of Listing

Agreement

He has not been an executive of the company in the immediately preceding three financial years

He is not associated with the statutory audit firm or the legal firm having material association with the company.

He is not related to promoters or persons occupying management positions at the board level or at one level below the board

He does not have any material pecuniary relationships or transactions with the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates.

He is not a material supplier, service provider or customer or a lessor or lessee of the company.

He is not owning two percent or more of the block of voting shares

Appointment of Independent Director

Appointment of Independent Director

An Independent director can be appointed by passing a Board resolution or Ordinary resolution in the General Meeting of the Company.

Duties & Responsibilities

“Duty is what we expect of others”“The price of greatness is responsibility”

Duties & Responsibilities

“Duty is what we expect of others”“The price of greatness is responsibility”

• As Present directors• As Past directors• As Members of Audit Committee• As Explicit and implicit• Responsibility for subsidiaries

Duties & ResponsibilitiesDuties & Responsibilities

Primary Duties:

• Act in the best interests of the company• Safeguard the interests of the stakeholders• Attend Board Meetings and participate in

decisions• Avoid conflict situations• Not seek personal gains • Maintain confidentiality• Fiduciary duty• Discharge duties required in specific committees

of the Board

Enhanced Responsibilities & Duties

Enhanced Responsibilities & Duties

● To compel directors to act in accordance with the strict terms of their mandate

● To compel them to exercise care and skill in carrying out their various functions

● To compel them to use their wide discretionary powers in good faith and proper purpose, &

● Finally, to compel them to act loyally in advancing the interest of their company.

Is an independent Director as a member of the Company Board equally responsible as the Company Board ?

Is an independent Director as a member of the Company Board equally responsible as the Company Board ?

No, unless he, the independent director, is charged with a

specific responsibility.

AN IMPORTANT QUESTION

Rights & AuthoritiesRights & Authorities

• Right to be sent the notice of every Board Meeting of the company in advance as per the Articles.

• Right to be sent the agenda of every Board Meeting of the company in advance as per the Articles.

• Right to be appointed on various committees like Audit Committee, Remuneration committee, Shareholder Grievance Committee etc.

• Right to vote on every matter brought before the Board of Company

• Right to get minutes of the Board Meeting

MYTHS…

MYTHS-Qualities of Independent Directors

MYTHS-Qualities of Independent Directors

Independent directors should have– Unbiased attitude– Highest standards of personal integrity– Excellent judgment and an ability to make

informed decisions within time constraints– Professional credibility– Capacity to think strategically– Demonstrate sound communication skills– Sound interpersonal skills – Team orientation

• Protection of minority interest• Impediments to cross border voting will be

removed• Insider trading and abusive self-dealing will

be prohibited• Board members and KMPs will be compelled

to disclose their interest in material contracts

MYTHS-Presence of Independent Director means…

MYTHS-Presence of Independent Director means…

MYTHS-Presence of Independent Director means…

MYTHS-Presence of Independent Director means…

• Employees participation in management: performance enhancing mechanisms will be promoted

• Whistle-blowers’ interest will be protected• Creditors’ rights will be protected through

security interest enforcement and bankruptcy laws

REALITY…

RealityReality

• Makes the Board of Directors broad based

• Inculcate professionalism in the working of the family businesses

• Brings more transparency in the functioning of the Board

• Enhance investors’ Confidence

Guidance for Independent Directors –The Taste and Smell Tests

Guidance for Independent Directors –The Taste and Smell Tests

• Reputation of company• Capability to meet the requirements and

expectations• Demonstrate independence• Whether the company has adequate controls and

whether they can be relied upon• Ability to resist pressure• Knowledge on current developments• Aware and abide by corporate code of conduct• Seek expert help• Prepare in advance for Board Meetings• Maintain Confidentiality