Short note on Independent directors as watchdogs of a company



India has always been a home to a general lack of accountability and consequential failure of institutional structures whether it be in governance or India Inc. i.e. the corporate world. Over decades, multiple efforts are made in both policy and regulatory circle to deal with this problem, in terms of introducing new institutions like SEBI, and placing new regulatory check like internal and external audit reports. However, above all these checks to keep the corporation clean from inside or in other words to improve the management itself, the concept of independent directors was introduced.


Chapter 11 of the Company Act, 2013 discusses this new type of director in detail and list downs its duties, qualifications, removal and rights etc. in all possible intricacies. As per section 149 of the Act every listed public company need to have one-third of its total directors as independent directors and certain public company need to appoint at least 2 independent directors to the Boards. These directors are supposed to ensure that corporate governance laws are properly and strictly complied with and the rights of minority shareholders are always promoted and protected.


Nonetheless, with the rising case of corporate mismanagement and failure of large institutions triggers two major questions. Whether firstly company directors can be truly independent, with their appointment, salary and removal virtually in the hands of promoters itself and secondly can an independent director be a solution to the majority-minority shareholders' tussle.


This concept as adopted from the US system was first introduced in the 1998 CII report which was further endorsed by the Kumar Mangalam Birla Committee and was finally announced in the Company Act, 2013. Thus under the Indian context, they are vested with both supervisory and managing powers. However, it becomes essential to see whether Independent directors have met with all the aims and objectives set for them or it has just become a theoretical concept with no significant impact in the real world.


Unlike the US corporate world where the shares of listed companies are held by public and

qualified institutional buyers in a spread-out manner and dispersed manner with all holding part of the whole. In India major shareholding lies with promoter group only having overarching powers in both decision making and management of the company. It hugely affects the appointment of Independent Directors, as the management recommends the name to the shareholders in the AGM, where the same management holds maximum shares and thus voting by shareholders are mainly rendered as a formality. Therefore, it is apt to argue that promoters of the company hold control over appointment and removal of the independent directors.


Multiple research papers in the direction to establish a correlation between power structure and loyalty has argued that directors will prefer to be loyal to the CEO of the company as he has major power control over the company even if the CEO is committing any wrong and illegal activities. These researches and reports put a major question as to whether the power control that the managing directors exert can affect the independent directors psychologically and tilt them towards accepting decisions taken by promoters.


The major drawback seen in this system is that in countries like the US and UK where the shareholding pattern is extensively dispersed, this concept was introduced to fill the gap between management and shareholders, whereas in India we have adopted it to tackle altogether a different issue of minority-majority shareholders tussle. Therefore when this concept has proven to be extremely successful in countries like the US and the UK it has partially failed in India.


In India, it is not the only fault of the Individuals appointed to this post, where his institutional function remains only as a façade to his individual motives, but an inherent problem with the institution itself.


Nonetheless, despite these shortcomings and problems that this institution has, it is an unquestionable fact that even in India, independent directors have improved the functioning of the management and has given a boost to proper corporate governance. Such as the power of the audit committee and nomination and remuneration committee are given to them. But certainly, this must not be confused with the fact that this institution still required multiple changes to adapt to the Indian situation where we find ways to manoeuver the way out of strict laws.


Thus, it can be concluded that independent directors though have proved to be successful on some frontiers but still with a long battle this institution needs to improve to win them all.