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The Myth of Independent Directors

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It is increasingly being recognized that the independent directors have a significant role to play in the progress of the company. This is based on the presumption that they are independent and not in any way affected by the promoters. The independence of independent directors is one of the questions which have come to the forefront time and again. It has been a subject of heated debate as to whether the independent directors are to contribute to the development of corporate strategy, reviewing the performance of management or whether their primary role is to protect the interests of the public shareholders by opposing questionable management policies and establishing adequate controls against the promoters and the management. The institution of independent directors was supposed to act as a bulwark against any opportunistic indiscretions that could be committed by the promoters and the management. This was done to promote investor protection through integrity and accountability. However, looking at the provisions relating to independent directors especially in the Listing agreement, the independence of independent director is highly jeopardized. This can be seen by looking at the various aspects with regard to the independent directors.

The first factor is with regard to the selection of the independent directors. As far as appointment of an independent director is concerned there is no selection procedure which has been spelt out by any committee or statutes worldwide. The committees have made an attempt to identify the number of independent directors who can be designated as the independent director in the board but to question as to how these members are selected was not addressed. There has been a lot of importance given to the word“independence” of an independent director but the selection of the independent directors lie in the hands of the owners of the company or they are directly handpicked by the promoters. It is seen the promoters in control take decisions that they may not be in the interest of small shareholders, an independent director must keep in mind the interest of all stakeholders. This factor therefore is considered a severe blow to the very basis of the concept of independent directors. It therefore raises a serious conflict in impartial and independent discharge of duties by the independent director. Therefore, there needs to be proper criteria’s which needs to be laid down and such criteria must be disclosed at the annual report for the shareholders to have a view regarding it.

Another aspect is that an independent director is a part timer and therefore is not able to function in an efficient manner. It is seen that an independent director spends only about 18 to 20 hours a week on board meetings of the company. An independent director has no right to interfere in the day-to-day operations of company. They are supposed to support the management in getting the delivery of what the objectives of the company are to its shareholders. If a director cannot get into a company’s day-to-day operations, he cannot understand how it is governed and will not be in the position to fulfill his responsibilities. The main source of information is the Chief Executive Officer and it is his performance they are supposed to be monitoring. There is no separate law under which an independent director operates. In other words, he has no legal protection from the management so that he can raise his voice fearlessly. For the involvement of independent director in day-to-days operations of company they must be given authority so that they can intervene in the day-to-day operations of company and may be able to raise their voice. The corporate governance norms expect a lot from an independent director. Taking into consideration the fact that he is only a part timer, he falls acutely short of his time and is not able to perform his functions. It cannot be reasonably accepted that a person who is appointed by the owner will not have any allegiance to the person by whom he is appointed

Many independent directors are not technically and professionally qualified to head the committees they chair in the companies. It is seen that usually a person who is selected as independent directors are generally a person of high repute. However, there is no specific qualification that is laid down for the appointment of independent directors. The only eligibility criterion which has been laid down in the clause 49 of the listing agreement is based on negative prescriptions. The criteria which have been laid down is that they should not have a material or pecuniary relationship or should not be related to the promoters or be an executive in the company for the preceding three years. Therefore, there is not a list of positive qualification that has been laid down which would be considered appropriate for the role. The definition also ignores the fact that even eminent persons who are normally selected are associated with the board.

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The myth of independent directors. (2018, December 17). GradesFixer. Retrieved November 1, 2020, from https://gradesfixer.com/free-essay-examples/the-myth-of-independent-directors/
“The myth of independent directors.” GradesFixer, 17 Dec. 2018, gradesfixer.com/free-essay-examples/the-myth-of-independent-directors/
The myth of independent directors. [online]. Available at: <https://gradesfixer.com/free-essay-examples/the-myth-of-independent-directors/> [Accessed 1 Nov. 2020].
The myth of independent directors [Internet]. GradesFixer. 2018 Dec 17 [cited 2020 Nov 1]. Available from: https://gradesfixer.com/free-essay-examples/the-myth-of-independent-directors/
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