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BACKDROP

Good corporate governance practices call for implementation and maintenance of sound standards of conducting business affairs of a company. Thus, fair and transparent manner of doing business by adopting the highest standards of professionalism, honesty, integrity and ethical behaviour together with complete compliance of laws are the prime necessities.

Out of many good practices, the requirement of having independent directors in the Board has been a crucial factor which has worldwide acceptance. 

In India, expert committees of the Government had opined from time to time that the Board of a company which was appointed by the shareholders was accountable to them. The directors were fiduciaries of the shareholders; not of the management. That did not imply an adversarial Board. However, where the objectives of management differed from those of the wide body of the shareholders, the non-executive directors on the board should be able to speak in the interest of the ultimate owners, discharge their fiduciary oversight functions, and stand up and be counted. That was the reason why 'independence’ of directors had become such a critical issue for determining the composition of any Board.

India had rightly has accepted this concept and legislated for independent directors in tune with the best governance practices.

Laws to this effect in the Companies Act 2013 and in the erstwhile listing agreement under the Securities Contracts {Regulation} Act 1956 which has since been replaced by SEBI {Listing Obligations & Disclosure Requirements} Regulations 2015, bring in the hope that, in the time to come, the Indian corporate will be better governed for all-round advancements.     

To enable independent directors to effectively carry out their functions, it has become essential that their conduct be regulated statutorily. This will not only bring much needed uniformity, but also usher in elements of best practices in their actions.

In this respect, section 149 of the Companies Act, 2013 has laid down a Code for Independent Directors in Schedule IV of that Act.

THE CODE

The Code is a well drafted piece of law. The preamble to the Code lays down that it is a guide to professional conduct for independent directors. Adherence to these standards by independent directors and the fulfilment of their responsibilities in a professional and faithful manner will promote confidence of the investment community, particularly minority shareholders, regulators and companies in the institution of independent directors.

Under various paragraphs, the Code provides the provisions relating to guidelines of professional conduct of Independent Directors, their role and functions, duties, manner of appointment, reappointment, resignation or removal, separate meetings, and lastly, evaluation mechanism.

Here an attempt has been made to discuss one of the requirements of the Code, viz, separate meetings of such Directors.

Exclusive and separate meeting

The Code lays down that the independent directors of the company shall hold at least one meeting in a year, without the attendance of non-independent directors and members of management

Before this became mandatory, some professionally managed companies in India, notably the listed ones, had been following this desirable practice. They held separate meetings for their independent directors without managements' involvement. But their numbers were too few.

Keeping in view the ground realities, one of the expert committees formed by the Government of India, namely, the Naresh Chandra Committee had given the following recommendation:

"Executive Sessions

To empower independent directors to serve as a more effective check on management, the independent directors could meet at regularly scheduled executive sessions without management and before the Board or Committee meetings discuss the agenda."

The underlying concept behind this provision is that the independent directors should be able to function at meeting/s exclusively held for them without the intrusion or interference from the non-independent directors, who in many cases are executive directors, the promoters or the members of the top management.

To begin with, it is mandatory to hold one such meeting in a year, but more such meetings can be held as and when it is required.

The items of the agenda have been specified in the Code itself as will be discussed hereinafter, but it is clear that at the separate meeting other critical matters needing the attention of only Independent directors could also be considered.  There is no restriction. 

It is, however, important that sufficient and timely information should be provided in advance by the management which would enable the independent directors to take meaningful and well-considered decisions. 

Presence of Independent Director

The Code lays down that all the Independent Directors shall strive to be present at such meeting.

The directors, including independent directors, function collectively in the Board meetings and they are duty bound to attend all meetings to carry out their fiduciary and statutory functions in the best interests of the company. If any director is not able to attend any meeting he should have adequate reason and obtain prior leave of absence from the Board.

The same principle will apply to the separate meeting.

AGENDA OF SEPARATE MEETING

Performance review

The Code, stipulates that the meeting shall review the performance of non-independent directors and the Board as a whole.

At the outset, it has to be understood that action on review of the performance of any person, at any level, has an element of subjectivity.  The matter of sensitivity also cannot be ruled out.

To bring in a systematic approach it is advisable that the process to be followed in this regard should be laid down by the Board itself with adequate deliberations, and, the same should be logical, reasonable and impartial.

In reviewing the performance of the non-independent directors who could be executive or non-executive directors, it is essential that adequate information and data are made available by the management to the Independent Directors, in advance.

To review the performance of the Board as a whole in a holistic manner it is obvious that such Independent Directors shall also review their own performance, albeit collectively. Here too, the importance of the availability of correct material cannot be overlooked.   

But one cannot also ignore the "perception, pre-conceived notion or bias" in the exercise.

It has, therefore, to be seen as to how effective and impartial the entire exercise will be, given the delicacy and psychological impact it can bring about.

It is also imperative that once the evaluation is done, the report should be discussed at a regular Board meeting. The Nomination and Remuneration Committee of the Board should also be involved in the process.     

Performance review of Chairperson

As per the Code, the meeting shall review the performance of the Chairperson of the company, taking into account the views of executive directors and non-executive directors.

This aspect becomes more important where the chairperson of the Board or the company is also a promoter. Good corporate governance requires that the endeavor of such promoter - chairperson should be to directly or indirectly encourage the independent directors to review of his/her performance, objectively and effectively.

Even for a non-promoter - chairperson, it is essential that he/ she should give requisite support for his/her assessment. Views of other executive and non-executive directors, given during other Board/ committee meetings, or even otherwise, from time to time, are advisable to be taken into consideration.

It is important that once the review is done, the report should be discussed with the concerned  chairman  and also  at a regular Board meeting. The Nomination and Remuneration Committee should also be involved in the process,  similar to requirement for review of non-independent directors and Board.          

Flow of information

Lastly the Code states that the meeting shall assess the quality, quantity and timeliness of the flow of information between the company management and the Board that is necessary for the Board to effectively and reasonably perform their duties.

The importance of information has been emphasized already. The background of this provision may also be based on the general view that many times the information given to the Board are received so late that the directors are practically not in any position to assimilate and use them for meaningful discussions and decisions at the meetings. Moreover, many times, huge volume of information or too meager details are provided which also do not help the directors. Hence an impartial assessment in this regard, and, ways and means to improve information dissemination where ever required, should be a regular feature of the Board functioning of any company. The Independent Directors, of course, would statutorily do this at their separate meeting. 

CONCLUSION

Although separate meeting of Independent Directors is a very commendable and worthy corporate governance requirement, one should be careful that the entire process should not become a mere formality in many aspects. This is very likely since the directors of a company would not be found to be unkind or harsh to their fellow directors or to the chairman with regard to performance review. This may result in an important aspect of this law of impartial assessment getting defeated. The promoter , the chairman, top management and those who matter in the organization should actively support this law in the letter and spirit.

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Category Corporate Law, Other Articles by - Amitav Ganguly 



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