Role of Independent Director in Corporate Governance

Pavan Kumar Vijay Managing Director

Monday, April 08, 2013

Concept of Independent Director

Independent director means a director who is not connected or associated with the company in any manner and works only to safeguard the interest of members who individually cannot look after their interest.

Genesis
The concept of Independent director has been originated to drive the companies towards inculcating the concept of corporate governance in their management.

What is Corporate Governance???

 Corporate Governance is the application of best management practices, compliance of law in true letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders. -The Institute of Companies Secretaries of India

Corporate Governance Framework

Wealth Creation
Output Input = Wealth Created

Wealth Management

Wealth Sharing
Happiness and Prosperity of all Stakeholders SUPPLIERS Adequate Returns HUMAN ASSETS Adequate Remuneration CUSTOMERS Affordable Prices PUBLIC Payment of Taxes and Partnership in National Development Projects

?
Reinvestment

Distribution

Enhanced Capabilities

Sustainability Research and Development HR Development Infrastructure Risk Management

Best Management Practices are Vital Here

Law and Ethics are Vital Here

Stakeholders in Value Chain

ROLE OF STAKEHOLDERS
Supply Funds, Materials and Services Value Addition and Management of Resources Give Opportunity to Co. to Satisfy their Needs

SUPPLIERS
Adequate Returns for Funds, Material and Services Supplied

HUMAN RESOURCE
Adequate Salary and Security for leading a Happy Life

CUSTOMERS
Best Quality Products and Customer Care at Minimum Prices

EXPECTATIONS OF STAKEHOLDERS Potential Suppliers, Human Resources and Customers Biological, Economic and Cultural Environment

PUBLIC

PUBLIC EXPECTS PARTNERHIP FOR SUSTAINABLE DEVELOPMENT

Satyam Vada Dharmam Chara

- Taittariya Upanishad

Forever speak the truth and follow the dharma

Truth : Disclosure of Actual State of Affairs

(Transparency in operations and transactions)

Dharma :

Dharma is for the stability of society, the maintenance of social order and the general well-being and progress of humankind.

- Karna Parva of the Mahabharata. Verse-58 in Chapter 69

Corporates are also expected to use their

Capacity, Knowledge and Resources TOWARDS

Dharma
Maximisation of stakeholders value and well-being and progress of humankind THROUGH

Truth

Transparency, accountability and truthful disclosure of state of affairs

This is our own age old mantra of

Good Governance

Companies that have followed these principles of Corporate Governance have

Consistently earned high returns, increased their net worth and enhanced their shareholders wealth

..and accomplished

WINNING EMPLOYEES

GROWING INVESTORS

DELIGHTED CUSTOMERS

HAPPY SOCIETY

TRUSTED SUPPLIERS

SATISFIED GOVERNMENT AND REGULATORS

Who is
Independent Director???

Independent Director

One who has Independency of Judgment

Absence of Material Relationship

Absence of Pecuniary Relationship

Independent Director

Vs.

Interdependent

Director

Definition of Independent Director Clause 49 (1)(A)(iii) of Listing Agreement

Not having any material pecuniary relationships or transactions with

the company, its promoters, its directors, its senior management or its holding company, its subsidiaries and associates.
Not related to promoters or persons occupying management positions

at the board level or at one level below the board

Not been an executive of the company in the immediately preceding

three financial years

Definition of Independent Director Clause 49 (1)(A)(iii) of Listing Agreement

Not associated with the statutory audit firm or the legal firm having

material association with the company.

Not a material supplier, service provider or customer or a lessor or

lessee of the company.

Not owning two percent or more of the block of voting shares

Directorships Matrix
Executive Group (Salaried) Promoter Group Independent Group

Managing / Whole Time Director Director Chairman

Executive Chairman

Executive /NonExecutive Chairman

Non-Executive Chairman

Position of Independent Director

Executive Director Owner Director Independent Director

Primary Duty

Board of Directors Interest of Company

Interest of Shareholder

Interest of Stakeholders

Enhanced Responsibility

Balancing of Interests

Independency of Director
Concept & Reality

Concept
Legal Disinterested director Unbiased decisions Balancing of conflicting interests Protection of shareholders interests Protection of stakeholders interests Protection of whistleblowers interests

Managerial Bring expertise in the Board composition Infusion of new ideas Develop a system in the Board Culture

Reality
Independent Director

Disinterested Director

Uninterested Director

No

Yes

Reality Appointment of Independent Director

Compliance in Spirit Compliance in Letter

Disinterested Director
Expert in a particular

Uninterested Director
Friend or relative not

discipline

coming u/s 6 of Companies Act

Reality Appointment of Independent Director

Compliance in Spirit Compliance in Letter

Knowledge about the

Companys business
Precedence to

Not concerned with the

Companys business
over knowledge
Yes- Man

knowledge over names

Capability to dissent

Precedence to name

Reality Working of Independent Director

Compliance in Spirit Compliance in Letter

Provides independent

assessment of business decisions.

Provides expert

Acts as per the whims of

management.

comments on the subject

Silent observer at the

Board meetings.

Reality Working of Independent Director

Compliance in Spirit Compliance in Letter

Informed decisions Ensures unbiased

Decision on selective

information.

decisions

Independent status

takes a backseat.

Independent Director
Critical Issues

Ingredients of Independent Directors

Independent

Eligible/ Expert

Sufficient Time

Corporate Governance

BUT
Those who are eligible, have no time.
Those who have time, are not eligible.

Informed Decisions Not possible

Insufficient knowledge regarding the business Reliance

on information

Executive

Director/CEO

for

Selective information sharing Lack of understanding

Capability & Capacity

No

legal requirement for qualification of Independent Director except for the member of Audit Committee who shall be financial expert. & phenomenon. ingredients are subjective

Quality

No independent appointment.
Major Shareholders Executive Directors

Independent Director

In 60% companies, Board consists of shareholders holding more than 50% stake.

Unbalanced Risk & Reward Equation

Compensation

Too less will deter experts from undertaking responsibility

Too high will loose independence .

Independent Director
Rights & Duties

Rights & Authorities

Right to attend and vote in every Board

Meeting. Right to be appointed on various committees. Right to demand information on every business matter.

Right to seek clarifications/justifications

Right to dissent.

Duties & Responsibilities

Primary Duties
Act in the best interests of the company Safeguard the interests of the stakeholders

Enhanced Responsibilities

To compel directors to act in accordance with the strict terms of their mandate

To compel them to exercise care and

Attend Board Meetings and

participate in decisions Avoid conflict situations Not seek personal gains

skill in carrying out their various

functions

To compel them to use their wide discretionary powers in good faith

Maintain confidentiality
Fiduciary duty Discharge duties required in specific committees of the Board

and proper purpose, &

Finally, to compel them to act loyally in advancing the interest of their company.

Independent Director Corporate Issues & Regulator perspective

Corporate Issues
Preference of Stakeholders interest above the

interest of Company.
Forces disclosure of confidential information. Interferes in Management Decisions.

Acts as Bloodhound dog.

Regulator Perspective
Independence director has primary duty towards the

Company and enhanced responsibility towards stakeholders.

Reduce conflict of interests of management. Ensures protection of wider interest of Company and

stakeholders.
Ensures transparency of information. Provides independent Assessment while evaluating

business decisions as an independent Business Advisor.

Acts as a watchdog.

Independent Director in a JV
JV Company
Partner A Partner B

Interest of Partner A

Reconciliation of Interest

Interest of Partner B

Interest of Company & Stakeholders

In this way INDEPENDENT DIRECTOR Ensures

Application of best management practices Adherence to ethical standards And
Discharge of social responsibility for sustainable development of all stakeholders

Compliance of law in true letter and spirit Distribution of wealth

In other words, CORPORATE GOVERNANCE

Corporate Governance at Infosys

Board Strength 15 Directors

7 Executive Directors

8 Independent Directors

ICRA CGR 1
And Thats what makes

CRISIL CRISIL GVC Level 1

Infosys
A value driven organization