Independent Director: Is Independence Really Guaranteed

Independent Director: Is Independence Really Guaranteed - Prolawctor.com

Introduction

Independent Director: A company is a separate legal entity. However, in reality the business of a company is always run by some individual. These natural persons can be a member, a director, a promoter, or any other person working on the behalf of the company. One such person is an independent director who takes care of the company and is a person of integrity, relevant expertise and experience.


The companies Act provides that at least one- third of the director of any listed company necessarily requires to be independent directors and further provides that the central government is empowered to provide a minimum no. of independent directors for any class or classes of company.[1] It is important to understand that an independent director is appointed by the company and is a person who is believed to possess due diligence, expertise and experience in the field. An independent director is required to improve the structure of corporate governance, for maintaining interests of all stockholders, and to protect rights and interests of small and medium size of investors.


However an important question which arises in the mind is since the appointment of the Independent director is done by the company itself and he remains in the office till the whims and fancies of the company and its board of directors, is he really able to perform his work independently. This paper is an attempt to a find out as to whether the independent director’s independence is really guaranteed.


This article will throw light on the aspect of whether an independent director is actually independent or not. It will also discuss the emerging challenges faced by the independent director in today’s corporate management. This article is based on the overall role of an individual who is appointed as an independent director of the company and to know whether he acts in the interest of the promoters or in the interest of the company. The paper will discuss the Satyam’s case as to how the concept of lifting of corporate veil has been used to find out the misconduct of the independent director for making him personally responsible for his acts.


IS THE INDEPENDENCE REALLY GUARANTEED?

The independent director is one who is enshrined with the duty to ensure that there is an unbiased approach in conducting of the affairs of meeting. He is a person who has been appointed to guarantee independence in taking decision and ensuring balance between the interest of the company and the stakeholders. The decision of an independent director should be independent of those having controlling powers in the affairs of the company.

But the question which arises is that whether in reality these directors are independent or it is only on the paper that they are termed as independent director. To answer this question there is two aspects which should be discussed first:

  1. The appointment of the independent director- violates the independence
  2. The removal of the independent director- violates the independence
  3. Pecuniary relationship- violates the independence

THE APPOINTMENT OF THE INDEPENDENT DIRECTOR

According to the section 150 of the Companies Act, 2013 it is made clear that any independent director should be appointed from a list of data base which consist of the names, address, and the other details of the person who either shows interest for the post of an independent director or is eligible to become independent director. It is important to know that it is the board of director who appoints the independent director in the general meeting. According to the Section 149(6)a of the Companies Act, it is the board of directors who is responsible to appoint an independent director on the basis of expertise in the field and the experience he possess. The term “expertise” and “experience” is too vague in itself to be a ground for selection of the independent director. There is therefore possibility of biasness in appointment of the independent director itself.

The above section suggests that there is a possibility that the person who is to be appointed as the independent director can be a person who is well known to the director even before the appointment. And if this happens to be the situation then the independence is lost at the very first stage of appointment itself. Thus, later it might lead to their influence in the decision making of the independent director


Further, since it is the board of directors who appoints the independent director, and the shareholders and promoters recommends the one to be appointment only from such list. There is a high chance of the decisions of the independent director getting influenced by the board of directors and the promoters. It is fallacious to assume that the decision of the independent director wouldn’t be influenced by the majority shareholders and their interests who include the promoters and the other member of the board of director who have appointed him.


THE REMOVAL OF THE INDEPENDENT DIRECTOR

The board of directors is empowered to evaluate the work of the independent director and on the basis of such evaluation mechanism report, the board of directors can either choose to continue or extend the term of office of the independent director. The independent director can be removed by the board of directors if they are of the opinion that the he is not performing his duties diligently as required by him to be performed.


It is a well settled principle that, it is the duty vested with the independent director to look after the affairs of the company with an unbiased approach. He is duty bound to protect the interest of the minority as well as majority shareholder. But there are times when instead of protecting the interest of minority shareholders, the decision of the independent director is influenced by the majority shareholder who have the voting rights during the appointment and the removal of the independent director in the general meeting and is of such nature which compromise the interest of the minority shareholder.


It is important to understand that the independent director is required to act impartially and perform his duty without fearing from or favouring anyone. But till the time an independent director is continued to be removed from his office by the board of directors who calls for a general meeting where the voting is held for the removal of the Independent director, which might also include the promoters and the members who have majority shareholders, there is a high chances of them getting influenced by the majority shareholder and favour them in an attempt to safeguard their position as the independent director of the company.

Therefore, it can be said that independence of an independent director is far away from reality
till the time the appointments and the removal of an independent director continues to take
place by the company itself.


PECUNIARY RELATIONSHIP- VIOLATES THE INDEPENDENCE

  1. Another important factor which might be relevant for the present subject is the pecuniary interest of an independent director or another words, the commercial interest of an independent director which might have a direct bearing on the working motive of such director.

  2. An independent director is entitled to be compensated for the services in the form of sitting fees and commission. The Companies Act, 2013 contains provisions which provide for the remuneration to be paid to an independent director. The same is reproduced as under:

  3. Section 310 – this section provides for the sitting fees of an independent director. As for the section, the sitting fees for an independent director for each meeting of board or committee thereof shall be as follows:

    In case of companies with paid-up capital and free reserves of rupees ten crores and above or turnover of rupees fifty crores and above – not to exceed ₹ 20,000 per meeting
    In case of any other company – not to exceed ₹ 10,000 per meeting.

  4. Section 309 – Commission to non-active directors (including independent directors): Not to exceed 1% of net profits if the company in question has an MD or WTD or a manager
    In any other case, not to exceed 3% of net profits.

  5. A practical view of the aforesaid provisions in comparison to the today’s scenario and the value of rupee would definitely suggest that the aforesaid remunerations, despite being statutory, seem absolutely insufficient to compensate an independent director for his time and energy which he may lend for the purposes of the company.

  6. Section 309 in fact, appears to be carrying a dichotomy in as much as a commission based on the performance of a company, meaning thereby, a share from the net profits, would definitely translate into higher commission for higher profits of the company. In this manner, the independent director, who is supposed to think and take decisions which are aloof of the theory of bottom-line which is mainly followed by the board of directors of the company, may not be able to do so.

  7. Another problem which might be faced qua the independence of a director is the common stipulation in the articles of association of most of the companies which providing for a minimum shareholding qualification for becoming a director (even if it is less than 2%). As such, if an independent director is to hold such minimum qualification shares, then he is being linked with the commercial interests of the company and as such, the objective behind appointing him as independent director, may get diluted.

  8. Therefore, the possibility of an independent director being influenced with the other decision-makers of the company for maximizing the profits of the company, inter alia, by giving a go by to the ethics of the company as well as the interests of the minority shareholders as well as the other stakeholders in the company including the creditors/vendors/purchasers/employees of such company.

SUGGESTIONS AND CONCLUSION

The paper was an attempt to identify whether the independent director’s independence is guaranteed or not in reality. The researcher through the paper have brought out how the independence of the independent director is curtailed due to certain reasons and circumstances such as appointment and removal of the independent director by voting in the general meeting called by the board of directors, which might influence the decision of an independent director and lead him to favour the majority shareholders. This might lead to compromising of the interest of the minority shareholders in an attempt to be reappointed to the post of the independent director. Therefore, it can be concluded that the term “independent” in the independent director is a mere misnomer as they are not independent in reality and are dependent on the major shareholders for their appointment and removal, are dependent on the auditors which includes both external and internal auditors for the finance related information and there is even possibility of them being influenced by the board of directors which might include promoters.


The researcher would thus like to suggest that in order to guarantee the independence of the independent director in real sense, what is required is to amend the provision of appointment under Section 150 of the Companies Act, 2013 and removal of the independent director in the manner as provided under Section 148 and Section 149 of the Companies Act, 2013. Therefore, these provisions should be amended and should be replaced with new provision which provides for the appointment of the independent director by an independent body and not by any member of the company or the board of director. It will help in achieving the objective and purpose of appointing an independent director that is to say it will help the independent director in exercising its powers and duties without any interference and influence of the majority shareholder.

by-  Romi Kumari

Symbiosis Law School, Hyderabad


References

  1. Rule 4 of the Companies Act provides for the following classes of companies;
    • The Public company with paid up share capital of at least 10 crore or more.
    • The Public company having turnover of around hundred crore or more;
    • The Public company having aggregate outstanding loans, debenture and deposits, exceeding fifty crore rupees.

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