MGT 625 - LEGAL ASPECT OF BUSINESS

(GROUP 9)INDIAN INSTITUTE OF TECHNOLOGY BOMBAY

WHO IS AN INDEPENDENT DIRECTOR?“Independent Director” means apart from receiving director’s renumeration, does not have any material pecuniary relationship or transactions with the company, its promoters, its senior management or its holding company, its associated companies and subsidiaries. The additional requirements are:• He/she should not relate to promoters or management at the board level or at

one level below the board• He/she should not be an executive of the company in the immediately

preceding three financial years• He/she should not be a partner or an executive of the statutory audit firm or

the internal audit firm that is associated with the company, and also not been a partner or an executive of any such firm for the last three years

• He/she should not be a substantial shareholder of the company, i.e. owning two percent or more of the block of voting shares

BENEFITS OF HAVING INDEPENDENT DIRECTORS

• Providing a Different Perspective: Independent directors often bring a fresh perspective to issues and are able to identify problems and suggest solutions

• Independently Approving Certain Board Actions: Raises the confidence level of shareholders and outside constituents if impartial persons approve the transaction and also mandate Independent directors for foreign unlisted subsidiaries

• Independent Directors play role as a Business advisor: IDs contribute to the development of corporate strategy, reviewing the performance of management and protecting interests of the public shareholders

• Counterbalance management weaknesses in a company: Ensure legal and ethical behavior at the company, while strengthening accounting controls, and also a source of well-conceived, binding, long-term decisions for a company.

ROLE OF INDEPENDENT DIRECTORS

2 key parameters are of interest • Independence of the board

i.e. the relative strength of independent directors vis a vis the non independent directors on the board of the company and,

• Diligence of the board i.e. the extent to which independent directors are diligent in their duties, reflected in the regularity of their attendance at scheduled board meetings.

HOW TO ENSURE INDEPENDENCE OF ROLE

• Avoid Long association with the company least you may be seen as company insider• Deprives the board of fresh thinking and the board continues to be guided by the wisdom of the

same person.• Ensure involvement in the decision making of the committees like nomination committee,

renumeration committee and audit committee• Conduct at least one meeting in a year without the presence of non IDs and the member of

management which is called ‘ Separate meeting’ with the objective to discuss and evaluate the performance of the company, its chairperson and other directors

• Seek clarifications or justifications• Undertake appropriate induction and regularly update and refresh their skills, knowledge and

familiarity with the company• Ascertain and ensure that the company has an adequate and functional vigil mechanism

HOW TO ENSURE INDEPENDENCE OF ROLE

• Ensure concerns about running of company are recorded and addressed by the Board. Suggest remedial steps and ensure proper implementation

• Not disclose confidential information, including commercial secrets, technologies, advertising and sales promotion plans, unpublished price sensitive information, unless such disclosure is expressly approved by the Board or required by law

• Report concerns about unethical behavior, actual or suspected fraud or violation of the company’s code of conduct or ethics policy

• SUPER WATCHDOG - who has to ensure that those in the day to day management (including all Directors on the Board) are functioning in the best interest of the stakeholders, minority shareholders, regulators, workers, customers and public at large

PRACTICAL DIFFICULTIES

• Selection Process•  Promoter has the final say in the appointment of independent directors. 

• Role of independent director in itself is paradoxical• He independently needs to monitor the activities of individuals who appoint him.

EXAMPLE : INFOSYS

Board of Directors (9)

Executive Directors (2)

Non Executive Director (1)

Independent Directors (6)

ROLE OF INDEPENDENT DIRECTOR IN BOARD MEETING (1)Board Meeting Agenda: • Collaborate with the Chairman and Corporate Secretary to set Board meeting

agenda • Ensure that matters of concern or interest to the independent Directors are

appropriately scheduled for discussion at Board meetings.

Board Meeting Schedule and Special Meetings: • Provides input to the Chairman as to an appropriate schedule of Board meetings

and shall have the authority to call special meetings of the Board.

Chair Board Meetings: • The Lead Independent Director shall chair Board meetings in the absence of the

Chairman • Provide feedback to the Chairman and others, as appropriate, from such meetings.

ROLE OF INDEPENDENT DIRECTOR IN BOARD MEETING (2)

Authoritative Role: • They can raise questions concerning the quality, quantity or timeliness of the

flow of information from management to the Board or concerning the performance of the Chairman

Evaluation of Management Performance: • The Independent Director, together with the full Board, evaluates the

performance of the Chief Executive Officer/Chairman and will meet with the Chief Executive Officer/Chairman to discuss such evaluation.

ROLE OF INDEPENDENT DIRECTOR IN BOARD MEETING (3)

Performance: The Independent Director should scrutinize the performance of  management in meeting agreed goals and objectives and monitor the reporting of performance

Conflict of Interest: • The Independent Director shall guide the Chairman and the Board on matters

of good governance, particularly where there may be a perceived conflict of interest.

• In instances where the Chairman may be perceived to be conflicted, the Lead Independent Director shall have the power and authority to lead and co-ordinate the activities of the Board.

THANK YOU !!