Be Mains Ready

Approach

• Briefly introduce idea of corporate literacy exam for independent company directors.
• Elaborate on the role of independent company directors in good corporate governance.

Introduction

• As per section 149 (6) of The Companies Act, 2013, Independent Director means any director other than a managing director or whole-time director or a nominee director.
• The government reportedly wants to introduce a qualification exam for independent directors.Online assessment will cover basics of Indian company law, ethics and capital market rules, among others.
  
  • This development comes at a time when several top banks are dealing with myriad accusations of improper lending, alleging lapses in their audits, for instance- Infrastructure Leasing & Financial Services (IL&FS) crisis, ban on Deloitte Haskins & Sells which failed to warn of mounting risks etc.

Body

Role of independent company directors in good corporate governance

The current law states that a company's board strength should comprise at least a third of independent directors. Their main responsibility is to function as a watchdog independent of a firm's influence and safeguarding the interests of minority shareholders amongst others.

• Independent judgment: Independent directors bring independent judgment to bear on the board’s deliberations
• Objectivity: While evaluating the performance of the board and management of the company bring an objective view.
• Monitoring performance: Scrutinizing, monitoring and reporting management’s performance regarding goals and objectives agreed in the board meetings
• Protecting stakeholders: Independent directors safeguard the interests of all stakeholders, particularly the minority shareholders; and balance the conflicting interests of the stakeholders.
• Risk management and financial control: Independent directors satisfy themselves about financial controls and systems of risk management and check on the integrity of financial information
• Remuneration: Establishing the suitable levels of remuneration of senior management, executive directors etc.

Improving corporate credibility and acting as a watchdog: Independent directors reports on the matters concerning the unethical behaviour, actual or suspected fraud or violation of the company’s code of conduct or ethics policy.

Way forward

• Under Companies Act and SEBI rules independent directors can be held personally liable for acts of the company carried out with their knowledge or when an independent director did not act diligently.
• Application of these rules along with the proposed exam should ensure an independent director is not merely perceived as a plum appointment that is accompanied by little responsibility.