Independent directors are known to bring an objective view in board deliberations. They also ensure that there is no dominance of one individual or special interest group or the stifling of healthy debate. They act as the guardians of the interest of all shareholders and stakeholders, especially in the areas of potential conflict.
Independent Directors bring a valuable outside perspective to the deliberations. They contribute significantly to the decision-making process of the Board. They can bring on objective view to the evaluation of the performance of Board and management. In addition, they can play an important role in areas where the interest of management, the company and shareholders may diverge such as executive remuneration, succession planning, changes in corporate control, audit function etc. Independent directors are required because they perform the following important role:
(i) Balance the often conflicting interests of the stakeholders.
(ii) Facilitate withstanding and countering pressures from owners.
(iii) Fulfil a useful role in succession planning.
(iv) Act as a coach, mentor and sounding Board for their full time colleagues.
(v) Provide independent judgment and wider perspectives.
Legal Position of Independent Directors
Independent directors are invited to sit on the board purely on account of their special skills and expertise in particular fields and they represent the conscience of the investing public and also take care of public interest. Independent directors bear a fiduciary responsibility towards shareholders and the creditors. The company and the board are responsible for all the consequences of actions taken by the officers of the company. Penal actions for defaults committed under the Companies Act, 1956 are either to be taken against an “officer in default” or a “director(s) or “persons” as provided in the relevant penal provisions of the Act. Section 5 of the Companies Act, 1956, defines the term “officer who is in default”. In the above context, Ministry of Corporate Affairs has issued General Circular No. 08/2011 (No. 2/13/2003/CL-V) dated: 25th March, 2011 regarding Prosecution of directors. Circular clarifies that Registrar of Companies should take extra care in examining the cases where following Directors are also identified as officer in default under section 5 of Companies Act, 1956:-
(a) For listed companies Securities and Exchange Board of India (SEBI) requires nomination of certain Directors designated as Independent Directors.
(b) For public sector undertakings, respective Government nominates Directors on behalf of the respective Government.
(c) Various public sector financial institutions having participation in equity of a company also nominate Directors to the Board of such companies
(d) Directors nominated by the Government u/s 408 of the Companies Act, 1956. Circular further provides that no such directors as indicated above shall be held liable for any act of omission or commission by the company or by any officers of the company which constitute a breach or violation of any provision of the Companies Act, 1956, and which has occurred without his knowledge attributable through Board process and without his consent or connivance or where he has acted diligently in the Board process. The Board process includes meeting of any committee of the Board and any information which the Director was authorized to receive as Director of the Board as per the decision of the Board.
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