INDEPENDENCE OF DIRECTOR

Myth or Reality

Pavan Kumar Vijay

Concept 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.

Genesis

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 means…

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

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

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

Definition under the Companies Amendment Bill, 2003

He should not be relative of Chairman or MD or Whole Time Director or Secretary.

He Should not have been an auditor, internal auditor or legal advisor or consultant of the company during any of the 3 proceeding financial years.

He Should not have been a supplier, vendor or customer He Should not hold 2% or more shares of the company, presently

or in past He Should not have hold any position in the Company, i.e. ex-

employee He Should not have been a Director for continuous period of 9

years. Nominee Directors of Bank or FIs will not be considered as

Independent Directors

Difference between the proposed definition under the Companies Amendment Bill, 2003

and Clause 49 of Listing Agreement.Companies Amendment Bill, 2003 As per Clause 49 of L.A

Should not be relative of Chairman or MD or Whole Time Director or Secretary

Should not be related to promoters or management at the Board level or at one level below the Board

Should not have been an auditor, internal auditor or legal advisor or consultant of the company during any of the 3 proceeding financial years

Should not have been a partner or an executive of the statutory audit firm or an internal audit firm or leagal and consultancy firm, during last 3 years

Should not have been a supplier, vendor or customer

Should not be a supplier, service provider or customer of the company

Should not hold 2% or more shares of the company, presently or in past

Should not hold 2% or more shares of the company

Should not have hold any position in the Company, i.e. ex-employee

Should not have been an executive of the Company in the immediately proceeding 3 financial years

Should not have been a Director for continuous period of 9 years

Appointment of Non Executive Director beyond continuous period of 9 years not permissible

Nominee Directors of Bank or FIs will not be considered as Independent Directors

Nominee Directors of Bank or FIs will be considered as Independent Directors

Definition of Independent Directors raises some very fundamental issues

Different definition of Independent Director in Companies Amendment Bill and in Listing Agreement

Disqualification of any person as Independent Director if he has been a Director or Independent Director of the Company for a consecutive period of NINE years

Persons having “any transaction” with the company to not to qualify as an Independent Director – a sweeping disqualification

Training related provisions

Qualifications & Disqualifications

No educational qualification under the Companies Act, 1956 Indirectly some qualification prescribed in New Clause 49 of

Listing Agreement (w.e.f. 31st March 2004) All members of Audit Committee shall be financially literate,

and At least one member of Audit Committee shall have accounting

or related financial management expertise Disqualification of Directors U/s 274(1) of the Companies

Act Various disqualification prescribed under sub clause (a) to (f) Section 274(1)(g) – In case of an existing director of a public

company, if such company : has not filed the annual account and annual return for any

continuous three financial years commencing on and after 1.04.99 or

has failed to repay its deposit or interest thereon on due date or redeemed its debenture on due date or pay dividend and such failure continues for one year or more

Retirement age of 75 years proposed U/s 280, as per the Amendment Bill

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”

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

Duties & 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

● 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 ?

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

specific responsibility.

AN IMPORTANT QUESTION

Liabilities

Ultra-vires acts Criminal liability under Negotiable Instruments Act Damages for breach of contract Director’s responsibility statements Liability of directors under other laws (Labour,

food adulteration, essential commodities, etc.)

Rights & 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

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…

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…

Reality

Work to safeguard themselves from liability Work in accordance with the wishes of Board of

Company

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

Thank You…

Pavan Kumar Vijay

MD, Corporate Professionals